Real Estate Investing Lessons Learned [From Industry Giants]

I’ve spent a lot of time and effort over the years trying to learn from experienced investors who have already succeeded in their careers, and one of the things I’ve really tried to take away from these conversations is a concrete pattern within the advice of the most seasoned industry veterans that have been through multiple cycles.

It’s easy to look at the results of a pre-built financial model or a nicely designed investment memo and rely exclusively on the cash flow and return projections within these, but to be successful in real estate over the long term, using investment principles alongside financial forecasts is an extremely important part of making sound investment decisions.

So to share some of the wisdom of a few of the most successful real estate investors I know, this article covers three of the most impactful pieces of advice that I’ve received over the years, from the leaders of some of the biggest investment and development firms within the real estate industry.

If video is more your thing, you can watch the video version of this article here:

On Taking a Profit

The first piece of advice I want to share comes from the president of a retail investment and development firm, who ran the company for over 30 years and saw the ups and downs of multiple real estate cycles. This is that, when considering selling a property, remember that, “No one ever went broke by taking a profit.”

One of the biggest concerns among real estate investors is the potential tax bill that might come along with exiting an investment and taking chips off the table, especially if the capital gain on the property is going to be significant.

Many investors try to avoid this by doing what’s referred to as a 1031 Exchange, which allows investors to defer capital gains taxes by buying a replacement property of equal or greater value, giving investors the opportunity to trade up into bigger assets and kick the tax can down the road for an indefinite period of time.

But when investors go this route, this can often expose them to an even bigger risk of loss than paying these taxes in the first place, and can lead investors to make short-sighted decisions that can ultimately hurt them over the long term.

This is often referred to as “Letting the tax tail wag the dog,” and commonly leads to investors overpaying for properties or settling for deals with poor underlying fundamentals (that they wouldn’t otherwise buy outside of an exchange scenario).

Ultimately, the fact that an investor will have to pay capital gains taxes shows that they’ve made money on a profitable deal. If they feel strongly that now is the time to sell and don’t feel comfortable redeploying that capital in the market (especially within the condensed timeline that’s required to complete a 1031 Exchange), taking a profit and paying taxes on that gain may be a valuable option to consider.

“You Can’t Eat an IRR”

The second piece of advice that really hit home for me came from a mentor of mine that ran an investment firm for over 20 years, raising capital from some of the biggest institutions and pension funds throughout the US, and this is that, “You can’t eat an IRR”.

What he meant by this is that, while high double-digit annualized returns might sound great out of context, investors need to evaluate these alongside other return metrics to make these meaningful.

A 15% IRR over a 2-year hold horizon is extremely different than a 15% IRR over a 10-year hold horizon, and how long you’ll have your capital out in the market (and where those returns are projected to come from) can tell you a lot about a deal and the risk you’d be taking on.

The IRR is a time-weighted return metric, which means that cash flows received earlier in the hold period are worth more than those same cash flows received later in the hold period. This tends to make this figure significantly higher when a property is sold relatively quickly and can make the IRR projections on a 1-3-year hold look extremely high on paper, even in scenarios where the whole dollar profit on a deal is projected to be low.

A high IRR also doesn’t tell you anything about where distributions are coming from, and whether these distributions will be made primarily from operations or primarily from sale proceeds. This is why some investors will actually “partition” (split up) their IRR, to quantify how much of their returns are coming from operating cash flow and how much they’re relying on a projected sale value to generate returns.

This is also why you’ll often hear the equity multiple being referred to as a benchmark to test the IRR against in many Break Into CRE courses, since this metric measures the amount of times over an investor is projected to earn their investment back throughout the life of a deal. And because this isn’t a time value of money metric, this can give investors a much clearer comparison between two investments that are projected to produce identical IRRs.

The bottom line here is that, when underwriting a deal or being presented with a passive investment opportunity, investors shouldn’t be solely focused on a double-digit projected IRR. Instead, it’s worth evaluating deals based on multiple different return metrics, that can provide a more holistic picture of deal performance overall.

You Can Always Refinance, But You Can’t Change Your Basis

The last piece of advice that I want to share in this article came from someone who ran the acquisitions department for over 20 years at one of the most successful multifamily investment and development firms in the US, and this is that, “You can always refinance, but you can’t change your basis”.

This essentially means that if you overpay for a property solely due to a low cost of capital in the market, while you might get away with this during favorable interest rate environments, when the cycle starts to shift and interest rates rise, this can often lead to issues down the road.

Many investors that bought properties in 2020, 2021, and early 2022 learned this lesson the hard way in 2023 and 2024 after buying deals at record low cap rates, with interest rates also at record lows during that time. And over the next few years, they then had to face the music, with significantly higher cap rates in the market and much higher interest rates that negatively impacted valuations.

When interest rates rise, commercial real estate cap rates also tend to increase. And when these things happen together, this not only leads to investors often missing the exit value projections they initially underwrote, but can also cause issues if investors had planned to refinance their properties during the hold at higher valuations and lower interest rates.

However, if investors focus on buying properties at price points that make sense on a per square foot or per unit basis without factoring debt into play, this can help prevent losses when buying in favorable financing environments. In addition, this can also often create tailwinds that might actually work in an investor’s favor when making acquisitions when interest rates are high.

The lesson here is to focus on buying real estate with strong fundamentals that’s priced at an attractive basis relative to the replacement cost of the property, or the cost to build a similar asset in a similar location. In most cases, if an investor can make deals pencil from that lens, the more likely that investor is going to be to experience success.

How To Learn More About Real Estate Investment Analysis

You can’t always sidestep every investment mistake just by learning from others, but these are three of the biggest lessons I’ve learned from some of my own mentors in the industry, and I hope these are helpful for you.

And if you want to learn more about commercial real estate investment analysis and how to build and use real estate financial models to make cash flow projections and analyze deals, make sure to check out our all-in-one membership training platform, Break Into CRE Academy.

A membership to the Academy will give you instant access to over 120 hours of video training on real estate financial modeling and analysis, you’ll get access to hundreds of practice Excel interview exam questions, sample acquisition case studies, and you’ll also get access to the Break Into CRE Analyst Certification Exam. This exam covers topics like real estate pro forma and development modeling, commercial real estate lease modeling, equity waterfall modeling, and many other real estate financial analysis concepts that will help you prove to employers that you have what it takes to tackle the responsibilities of an analyst or associate at a top real estate firm.

As always, thanks so much for reading, and make sure to check out the Break Into CRE YouTube channel for more content that can help you take the next step in your real estate career.