10 Things Trump Can Actually Teach You about Becoming a Real Estate Billionaire
How to kill it in commercial real estate
While Trump is easily the worst politician of all time, he’s arguably one of the most successful real estate developers. (Should have stuck with that.)
With an estimated net worth of $4.5 billion dollars, it’d be crazy not to at least dig into the secrets behind his wild success.
After thumbing through the classic real estate book, The Art of the Deal (1987), his national bestseller book that’s a hybrid of business advice and autobiography, I noticed ten key patterns that contributed to his success.
Here are the 10 keys to his success:
1. Pushes others hard and himself harder
“My style of deal-making is quite simple and straightforward,” he says. “I aim very high, and then I just keep pushing and pushing to get what I’m after. Sometimes I settle for less than I sought, but in most cases I still end up with what I want.”
This is noticeably a huge driver to his success.
Trump also reveals that the reason so many developments fail or go bankrupt before doors even open is because of the failure to push costs down and get things done quickly.
“At the time I built Trump Plaza in Atlantic City, banks were reluctant to finance new construction at all, because almost every casino up to then had experienced tens of millions of dollars in cost overruns.”
Like, ahem…the Hilton casino. (More on that later.)
Because real estate development is subject to enormous cost overruns and delays, it takes serious pushing in order to come out on time and under budget. More on how he avoids cost overruns later.
“Much more often than you’d think, sheer persistence is the difference between success and failure.”
2. He buys during economically depressed times
While everyone else is griping about the market downturn and putting freezes on spending, Trump is scrutinizing the market, plodding his next move.
He’s looking for foreclosures and properties in crumby neighborhoods that no one would consider buying. “The worst of times often create the best opportunities to make good deals,” he writes.
Why?
This opportunistic style of building positions himself to have considerable leverage to negotiate (and win) at every point in the deal. “Leverage,” Trump writes, “Don’t make deals without it. Enhance”.
Let’s look at a few reasons why this works in his favor:
- Tax advantages
He has the opportunity to take advantage of stimulus-type development incentives, like tax abatements, due to it being a low-point in the cycle (aka freezes on spending, buying, and construction). - Lower construction costs
Construction work is likely to be extremely slow during downturns, if not just completely dry. Trump saw it as an opportunity to negotiate lower construction costs since there was less demand. - Low purchase price of property
Economically depressed times send real estate values down. Amplify this for less desirable locations. That means he’s able to pay the lowest cost possible for his development location.
All of this boosts his bottom line tremendously, meaning that if he can deliver on his vision, his deal will make him a handsome profit.
Alright, let’s talk numbers for a sec. (I’ll make it easy, I promise.)
See this shabby, old place? This is the Commodore Hotel, which Trump bought in 1974. “The hotel and the surrounding area were unbelievably run-down. Half the buildings were already in foreclosure. The brick façade of the Commodore was absolutely filthy, and the lobby was so dingy it looked like a welfare hotel,” Trump wrote.
Any guess as to how much he paid for the 1,500,000 square-foot hotel and the property underneath it?
$10 million … a bargain.
- Loan= $80 million.
- Construction costs= less than that
- Taxes= $250,000/yr for 40 years + percentage of profits
The tax abatement ended up saving him millions of dollars that added to his profit.
By the time the renovation had been completed in 1980 and the doors were opened, he was able to charge $115 a night per room, compared to the $20.80 rate that the Commodore Hotel was charging in 1974.
He split the hotel ownership 50/50 with Hyatt, so that someone knowledgable would run it after he’d finished the building.
Here’s the hotel that the Commodore was ultimately transformed into: The Grand Hyatt.
Not bad for a twenty-eight year old.
3. He’s an excellent salesperson
Being a great salesperson is key to Trump’s art of the deal.
If you want to convince a bank to take a chance on you and loan you millions of dollars to build — you’ve got to put up a hell of a sell.
Sure, you need plans, architectural drawings, and other pieces in place, but when it comes down to your one shot to get the deal… all the pressure rests on the pitch.
And banks aren’t the only ones that need convincing.
There are multiple parts to any development deal. Here are two other parties who you’ll need to successfully sell on your vision:
- The seller of the property
- The city or local government (for zoning, permission to build, licensing, and tax agreements)
Like a great salesperson, he was confident, highlighted the benefits that his building would bring to the city, how it would spur economic growth, etc.
When giving his bank pitch he talked about “how the job was going to turn the neighborhood around, how it would create thousands of jobs. We would go on and on about the fantastic, incomparable Hyatt Company, and we’d even mention the great tax abatement we’d get from the city.”
4. Extremely resourceful
I’d call him a maximizer. Always squeezing out every last drop. The guy leaves nothing to waste.
Building the Trump Tower — he wanted the building to be a staggering 70 stories high — something that was unfathomable to the local government at the time.
In order to reach his goal of 70 stories, he’d have to maximize his FAR (floor area ratio) and stay within city approval limits- something that critics and others in the real estate industry said was nearly impossible.
The absolute maximum he could get (with bonuses) would be 21.6.
He worked tirelessly with a team of architects drafting building plans that would meet this lofty goal. He presented his plans numerous times, only to be rejected by city over and over.
But he didn’t stop there. He fought his heart out for his goal of the 21.6 FAR, keeping his dream of the 70-floor hotel top of mind.
And in the end, he negotiated a FAR of 21 (just barely under the max) bringing his building to a total of 68 floors, making Trump Tower the tallest residential building in the city.
5. He takes calculated risks
Despite owning casinos, Trump doesn’t gamble. Instead, he’s strategic in everything he does.
He researches. He looks around. He talks to people. He reads the news and takes note of past failures and successes of others.
He says that one of the secrets to his success is to always “protect the downside and the upside will take care of itself”.
No clue what that means? Here’s an example of how he did it.
When he was building his casino in Atlantic City, he managed to piece together a great site on the Boardwalk.
The individual deals he made for parcels were contingent on his being able to put together the whole site. And until he achieved that, he didn’t have to put up much money. (Downside protection #1.)
Backup plan: He knew that if he didn’t end up getting his gaming license, he could always sell the site to another developer for a good profit. (Downside protection #2.)
After assembling the site, he didn’t rush to start construction like the other developers (highly risky; more on this later). He held out until he got his license. The downside meant that he had to pay the carrying charges for a longer period. (Downside protection #3.)
“But before I spent hundreds of millions of dollars and several years on construction, I wanted to make sure I got my gaming license. I lost time, but I also kept my exposure much lower.”
Do you see how he took it step by step, keeping his risk very low? Keep reading to see how his casino deal turned out.
6. He always avoids putting his own money down
When buying a house you expect to shell out a standard rate of 3.5% up front. With an average home cost in the U.S. of $272,000, that would be a down payment of $9,552.
Okay.
But just imagine what the down payment is like for a multi-million dollar piece of property or building.
That’s um … a lot.
So, after Trump got his licensing on the Atlantic City Boardwalk site, something unexpected happened.
Holiday Inns popped in and offered to be his partner. But … it gets better.
“Some people said, “You don’t need them. Why give up 50% of your profits?
But Holiday Inns also offered to pay back the money I already had in the deal, to finance all the construction, and to guarantee me against all losses for five years.
My choice was whether to keep all of the risk myself, and own 100% of the casino, or settle for 50% stake without putting up a dime. It was an easy decision.”
So you can see that by taking care of the downside and finding ways to avoid putting money down, his deal was successful.
But the next piece is probably one of the most critical reasons why his casino made it.
7. He plans his building carefully BEFORE moving ahead
Growing up helping his father run his own real estate development business certainly didn’t hurt.
Early on from watching his father, he learned a critical key to succeeding in the business…something that turned out to be a huge advantage for Trump.
Trump refers to him as a “demanding taskmaster” and tough negotiator who was persistent in keeping costs down and getting the job done quickly.
He’d have his building up and running before his competitor. He describes that “eventually one or both competitors would go bankrupt before they’d finish their buildings, and my father would step in and buy them out. I saw this happen over and over.”
Catching onto this key was essential to his real estate success, especially when it came to building his casino in Atlantic city.
This key actually panned out for him twofold. After watching 3 casinos fail before they opened because they rushed to begin before licensing, Trump planned it out.
This might sound obvious, but he had the city approve his casino-hotel plan, make their changes to it, and get his license approval all before construction even began.
At the same time Baron Hilton took a “bolder approach” setting up a Hilton Casino. “In order to get opened as quickly as possible, he filed for a license and began construction on a $400 million facility at the same time. But then, two months before the hotel was scheduled to open, Hilton was denied a license.”
Guess what happened?
Trump bought him out (for a discounted rate), renamed it Trump’s Castle, and now it’s one of the most successful hotel-casinos.
That left Trump with TWO Atlantic city hotel casinos: the one he bought from Hilton and the one he built.
8. He invests in the best management he can get
Investing millions of dollars, years of time, and loads of stress into getting the proper permissions and approvals, licenses, and zoning into a property; there are the construction costs.
Then what? It’s time to run the business.
Trump knows that the key to recouping his investment is by earning profits from an extremely well-managed operation.
And I’ll give you a hint: a well-managed operation doesn’t just mean increasing revenues.
He explains that “the smarter guys understand that while big revenues are great, the real issue is the spread between the revenues and the costs — because that’s your profit.”
Like I explained earlier, he typically partners with a hotel and splits the equity 50/50, like he did when he built his casino in Atlantic city, which earned $35 million the first year it opened in 1985.
His tip is to hire by one rule: “hire the best people from your competitors, pay them more than they were earning, and give them bonuses and incentives based on their performance.”
9. He dreams big
Most of his visions were considered outlandish or impossible.
“I wasn’t satisfied just to earn a good living. I was looking to make a statement. I was out to build something monumental — something worth a big effort”.
It guides everything he does — from every window, to the marble color, to the trim inside the building to every last minuscule detail.
“Most people think small, because most people are afraid of success, afraid of making decisions, afraid of winning,” he writes. “And that gives people like me a great advantage.”
10. He’s uses more courage than most people
It takes a lot of guts to put yourself on the line for $90 million when you’re any age…let alone your mid-twenties.
He takes big risks. And usually comes out with a big reward. But sometimes he fails, too. With control of over 500 businesses, his corporations have filed for bankruptcy four times.
The point is that fear is a huge driver in success.
People say it’s purpose that gives energy, but what is purpose? It’s a vision to achieve; it’s one that challenges you past perceived limits.
A purpose isn’t fun all of the time because you have to challenge yourself and sometimes that means failing. But in the end it’s worth the reward.
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