Hello Mr. Collier,
I hope all is well with you.
When you have some time, could you please answer the following questions?
Thank you so much for your time, consideration and wisdom.
Do you believe it’s wise to build infrastructure before the business needs it, or build the business and then build the infrastructure?
Usually they went hand in hand i.e. built it as I needed it, though if I ran across a really good person, I’d hire them and find a Quad 2 (Important but not Urgent) use for them until a Quad 1 (Urgent and Important) need arose. In my capital constrained (to put it mildly) boot strap days, I generally did not spend a dime until I absolutely had to.
Do you prefer building a new asset, or buying an asset and adding value?
Developing is a special skill set, a bit more sophisticated and significantly more risky than buying, a LOT more unknowns. When you buy, you know your rent roll, your asset is in place, and you don’t have completion risk or possibility of cost overruns. My 1st development was a mere 21 apartments, then 48, then 105, then 240; largest I’ve done is 420 apartments.
When does it make sense to build a new one versus buy one?
When the Rate of Return is better enough to offset the risk.
How did you all choose to expand in the different cities where you’ve expanded?
Intersection of geographic proximity and investment opportunity.
What do you think of 1031 exchanges?
Not much. Folks get so enamored with the idea of avoiding capital gains tax by doing a like kind (Starker exchange to us old timers) that they end up doing a mediocre deal. When you sell, you have to put the money in escrow with an intermediary and you have 45 days to identify the like kind property and a total of 180 days from sale to close. Well, I have enough trouble finding good deals in normal circumstances, I don’t think I want to try to lock up a deal with a 45 day clock running. You can “over identify” which helps a bit but what often happens is people try to find the property they want to “buy”/exchange for in advance of their own sale and end up paying a premium (i.e. too much) in order to lock it up especially if it takes longer to close their sale than they expected, which it usually does. Or they end up caving on negotiations in order to speed things up i.e. they fritter away all the tax savings they are trying to protect. The hilariously sad thing is that they are giving up valuable real dollars merely to POSTPONE paying taxes. The low tax basis in their old real estate is carried over into the new real estate and thus the tax bill upon its sale will be that much greater!
How do you know when you have made a good decision?
Time will tell and I’m not even sure that is a valid indicator! Not every good decision means a good outcome (I could take 5 to one odds on an honest coin coming up heads and it could still come up tails) and not every good outcome means a good decision (Rent due, utilities past due, fridge empty, dad uses entire paycheck to buy lotto tix, wins $10,000: Good outcome, lousy decision).
Over a long enough time horizon (to factor out both luck and operating in an environment that aligned with a particular style v. ability to adapt to changing conditions) all you can say is that if someone accumulates enough good outcomes, then you have reasonable empirical grounds to call them a good decision maker. Labeling individual decisions in another matter entirely.
Was your business growth from 1972-1982 strategic?
Strategic? I’m not sure I really knew what that word meant back then. I was just buying anything I could finance, was solid construction, walking distance to UF and would cash flow. I threw in the management because I was doing it myself in the time others were watching TV, also did a lot of the simpler maintenance cause my Dad was a civil engineer and taught me to be a jack of all trades.
As always, I share what I most want/need to learn. – Nathan S. Collier