Alex Bain's Blog

My real estate investing beliefs that get me in trouble

How many times have you heard someone say:

"Owning real estate is better than renting because, when you rent, you're throwing money away."

It's such a common sentiment, it can actually be awkward if you try to offer a dissenting view point. The problem is, the conversation quickly gets heated in many cases, because the person with whom you disagree has usually made a significant financial investment in real estate, and they want to defend that investment. Because I'm relatively young, and haven't invested in real estate, I'm quickly labeled as naïve.

Well, I have reasons for the way I feel, and here they are.

There are 6 situations where I think a real estate investment makes sense, and none of them involve avoiding "throwing money away". There's some overlap, or, as we would say in consulting, this list is not M.E.C.E. (mutually exclusive and collectively exhaustive):

1. The home you want to live in, has no equivalent that can be rented. For example, there aren't many $10M homes that can be rented. If that's where you want to live and you can afford it, buy it. If you want to live in the building right next to your office to have a walking commute, and that building only has condos for sale, it may make sense to own.
2. Your investment portfolio can absorb the down payment without being overwhelmed. If the $40K down payment on an urban condo is a reasonable % of your portfolio, it can be a great form of diversification, as real estate and securities are somewhat uncorrelated (+0.24 r-squared between US REIT's and the S&P, according to Investopedia). You can get a lot of the benefits of exposure to real estate through financial engineering without actually owning a home (e.g. buying into a REIT), but home ownership preferred by many.
3. You have a unique opportunity that looks HIGHLY likely to prosper. If you have a friend with a lengthy track record of success, who offers you the opportunity to join him in a project, perhaps that deserves a disproportionate allocation in your portfolio. The key is, anytime you're buying real estate, someone else is selling. What do you know that they don't? If your friend is letting you in on his project, is it because he needs capital, or because he sees this as riskier than previous projects? If someone needs to move in a hurry, perhaps because of their career, you may find yourself with a unique, below-market investment opportunity.
4. You live in Florida, and you're at risk of going bankrupt. Not even necessarily imminent Chapter 11 danger, but if it's a possibility worth considering, buy property :-)
5. You lack the financial acumen/discipline to put together a diversified investment portfolio. It's nothing to be ashamed of. Buying a house usually requires the tenant to lock up a large amount of capital for a long time, and continue to pay down their debt over time. Many of these same tenants may have ended up consuming, rather than investing, a good amount of the capital were it not placed in an illiquid real estate investment.
6. The stigma associated with renting. This is the worst reason to invest, but it is a fact that your friends and family may consider you a failure if you are still renting beyond at a certain age. Perhaps this is because they assume you should have saved enough $ by that age to be able to allocate a reasonable % of your savings to cover a down payment on your home.

Am I missing something? Let me know in the comments.

When the learning happens

I find that 95% of the lessons I'll remember from HBS were learned at one of two times:

1. The last 15 minutes of any class where the protagonist is in the room. We get a visit in about 1 out of 3 classes, and about 1 out of 4 of those visits I'll remember forever. Sometimes the entrepreneur has really practical advice, sometimes they're just inspiring, & sometimes their tale is cautionary.
2. The last day of any class. Professors usually gives a summer lecture at this point, and it helps me figure out why we sat through all the other cases. Personally, I rarely see the big picture after discussing something for 80 minutes, but I am entertained enough that those are enjoyable. After sitting through 20-30 of those per topic, if you tell me what I learned at the end of all that, it clicks all of a sudden. If I just sit through that lecture on the first day without the cases? I'm sure I fall asleep, miss everything, and claim it's irrelevant. The system works.

After 3 semesters, I'm finally seeing the pattern.

Great quote from my entrepreneurial finance professor

"I'm sure you're all tired of looking at these cases through the 'People, Opportunity, Context, and Deal' framework. I know I am, and I invented it!"

From Prof. Bill Sahlman, in HBS' second year course: Entrepreneurial Finance

Last day of my first year

Today, I had the last class of the first year HBS :-(

My camera broke the other day, and I felt paralyzed not being able to take any pictures. This felt like an incredibly important moment in my life, so I convinced myself that I was better off just really concentrating on the moment and soaking it in. This has worked 3 other times that I can easily recall:

• The last day of my summer internship at Bain & Company in 1999. I had never been around so many brilliant people at the same time before that summer, and I was afraid to move out of my cubicle, because I didn't want to risk that something might happen that would keep me from being in such an environment ever again. I remember putting items in a big box on the last day and just saying, "If you never have a job again that you love this much, no one can take this summer from you." As it would turn out, I'd be back in nearly the exact same cube about 20 months later.
• The night after my college graduation. The ceremony was nice, and so was the dinner with my family afterwards, but I hadn't moved out of my form room yet, so my family drove back to Boston and I had a lovely, quiet evening largely to myself where I walked around the school and just soaked in as much of Providence and the campus as I could. Didn't take any pictures, but I remember it like it was yesterday.
• The day I finally sold my first car. It was really sad to say goodbye to Saabina. She had stuck with me through 40K miles worth of amazing memories and milestones. When the time had come to move to San Francisco, I needed about 10 minutes to pet her and relive all that we had gone through before I could turn the keys over to the dealership buying her.

It's always a lot easier to say goodbye to people when you know exactly when you'll see them again. Well, I know that I'll see almost all of these people next September, but as much as I'll miss the individuals, I'm also going to desperately miss the context surrounding this year. We came together each day, at the same time, in the same seats, thoroughly prepared for 2-3 seriously engaging conversations about fascinating topics. Next year, I'll be meeting at different times, in different, rooms, with different people each day. For a guy that has more than a mild case of OCD, this is just not nearly as good. The other thing is, the first year bonds me, not only to my section mates, but to all those who have ever walked the halls of HBS. Their first year experience was largely identical to my own, all the way down to the silly jokes that get passed on each year. This school became part of our identity somewhere between the first day, when we were nervous as hell to even talk, to today, when we felt so comfortable in class that one student spontaneously began playing his trumpet while the professor was talking.

What's nice day about this is that I'm starting to see a pattern. I don't need a camera to hold onto a memory, and I don't ever need to think that a period of my lie is unbeatable, because things just keep getting better. If all goes well, I hope to be stepping outside for a breath of fresh air on 9/20/2008 thinking, "I want to hold onto this night, my wedding, for all time." And if I've learned anything in business school, it's that that memory won't fade away.

My HBS learning team goes to Fenway

Every year at HBS, students diligently meet with their learning teams each morning before class... for about 4 weeks, until they grow annoyed at having to wake up extra early, and the learning teams disband.

Well, mine didn't. I got lucky. We still meet every morning. One kid dropped out, but the rest of us are morning people. You can probably count on one hand how many teams are still active, and the class started with ~120.

Now the year's wrapping up, and I'm seeing that this has been about more than case preparation. When you go through something that's intense with someone, you rely on them, and you refuse to let each other down, you're bonded to that person for life, like it or not. There were over a dozen times this year where I was only able to make a meaningful contribution to my section's discussion because of the hour I spent with my learning team down in the school's grill. In 20 years, if I get a call from one of these guys, and I'm in a position to help them, how could I ever say no?

In light of this connection that's formed over the year, we've been debating what sort of ceremony we should end our streak of mornings with. We went in on a group purchase (embroidered sweatshirts, honoring Joe, one of our most valuable contributors), but I also thought it'd be fun to spend time together outside of the context of case preparation. So we all went to a Sox game together. For three members, it was their first time at a baseball game. We had a blast, reminiscing about the year and talking about baseball.

Speed eating twinkies

HBS has an annual event called the Section Olympics, where each of the 10 sections of 90 students compete against each other in a number of events like: tug of war, dodge ball, quiz bowl, and twinkie eating. While I was very interested in participating in dodge ball, it turned out that my section believed my comparative advantage was in twinkie eating. I relented, and volunteered for the task.

Based on my experience with hot dog eating in the 2002 Nathan's Famous LA qualifying tournament, I believed that the "Solomon Method" (pioneered by Takeru Kobayashi) was not the style of choice for twinkies. My assertion was that water on the bun helped those who could open their throat widest, and those from whom quantity was of no concern. I knew my limitations, and I knew that my thoat is not wide, and I don't have infinite capacity for twinkies. I figured I would have to win the old fashioned way. Boy, was I wrong.

As soon as the gun blew, I started chomping away on my first twinkie, and my mouth instantly dried up. Without water, I simply couldn't swallow. There was no way to finish these things quickly. When I started choking on the second twinkie, I swigged some water and the whole thing disintegrated in my mouth and I could swallow it easily. For the third twinkie, I placed almost all of it in my mouth, immediately chugged water, and it was gone instantly. At this point I was in a rhythm, but there were two big problems:

1. I had lost nearly 90 seconds in a 300 second contest figuring out the best method.
2. I didn't have a basin of water to dip the twinkles in, so I was forced to place the twinkie in my mouth and swig water from a bottle. This cost me time as well, in addition to causing me to drink more than necessary on each twinkie, filling me up quickly.

By the time there was 30 seconds left, my official scorekeeper had me at 14, and the winner was closing in on 32, so I basically stopped. I may have been able to finish a few more if it had been close. I noticed something unusual though: the twinkie bin of the contestant next to me had about as many remaining as mine, even though he'd been given credit for 18.

I was told later by eagle-eyed audience members that my scorekeeper had not counted 2 of my first three twinkies and had missed at least another two throughout the rest of the event. I had actually eaten at least 18, if not 20. Additionally, the winner had likely had a few of his twinkies double-counted as he was splitting them in half and eating one half at a time.

If all this is true, and I was actually within 4-6 twinkies of the winner, then I really wish I'd used better technique, I wish the scoring had been more accurate, and I wish I hadn't written off the last 30 seconds. Unfortunately, this event won't happen again next year. I blew my only chance :-(

The good news is that I have an incredibly supportive section that remembered I participated in this event as a favor to them. They consoled me, and they proceeded to kick ass in every other event, but the quiz bowl. We went on to finish 2nd out of all 10 sections in the overall standings, and we would have won if some other kid had known in the quiz bowl that Zinedine Zidane was from France. He became the section scapegoat, and I came off smelling like a creme-filled rose :-)

[Incidentally, I marched out to the competition wearing a towel with my head slipped through a hole cut in the middle. Most of the 700 audience members believed this was because I wanted a bib, instead of catching the subtle homage to Mike Tyson.]

Stem Cell Research in my future family

Last night, I went to a University of Wisconsin alumni event, where Lisa's aunt, Alta Charo, was giving a talk on stem cell research, and the politics around the topic.

The night was noteworthy to me for a number of reasons:

1. Lisa's aunt is a professor of bioethics at the UW law school, so she has a uniquely informed perspective.
2. She's testified before congress, been interviewed on CNN, and been published over 100 times. Not only does she know what she's talking about, but she knows HOW to talk about it.
3. She's an absolutely captivating speaker. I was really impressed with her approach, and how accessible she made a challenging topic for a roomful of newcomers to the field.
4. Her speaking technique hit on 3 of the tips we were taught at HBS in our first semester Leadership class: a) Highlight the accomplishments of individuals in attendance, b) Create a sense of urgency around the matter, c) instill a sense of hope for the future.
5. I hadn't previously understood how much state funding was going towards stem cell research, and how many problems the absence of federal funding was creating. Even if one didn't support federal funding for moral reasons, they must still concede that it's absence generates loads of economic inefficiency.
6. The event was hosted at Anthony's Pier 4, a famous Boston seafood restaurant. Not only is the view there gorgeous, and the food delicious, but they have a really impressive collection of historical paintings of the city of Boston. They also have hundreds of photos of the celebrities that have dined there while in town.

After the talk, we got dinner together, then came back to our apartment, where we caught up with Lisa and her aunt. I realized that a lot of our stories involve our cat. I promised not to become a person who always talks about my cat, but now I've broken the promise. Shoot.

Beard of strategy

I had a lot of time to not shave over spring break (~10 days), so on the last night I shaved a homage to my strategy professor, Stephen Bradley. [his professorship was endowed by a man named William Zeigler]

He taught the entire class without noticing, and actually wasn't that impressed when I pointed it out to him, although the rest of my class got a kick out of it.

Often heard at HBS

2 big words at HBS are "decouple" and "impute"

These words aren't new to me, but you don't hear them very often in other contexts, and they've been popping up a lot in class lately.

John Brandon speak at HBS

I saw my old boss from Apple, John Brandon, speak on Wednesday night. He is in charge of the sales force for Asia, Australia, and all of the resellers (like Best Buy and Wal-Mart) in the Americas. That's ~/3 of all of Apple's business. He's brilliant, but his reputation within the company (and everywhere else he's worked) is for being exceedingly honest and moral.

He came to HBS at his own expense to speak to the Christian club at the school. I'm not a member of the club, but attended the meeting expecting an amazing speech, and he did not disappoint. His speech was mostly about how it is not only possible, but easier to be successful in business if you live your life by a strict moral code, and he suggested 10 rules with which to guide your decisions. He acknowledged that this is a tremendous challenge, and he provided real examples from his career of times when it would have been simpler to tell some fibs and conceal the truth, but he's not that kind of guy and it generally benefits him in the long run.

Here are his rules:

1. Out with the old in with the new.
2. Always tell the truth, we want to know the bad news sooner than later.
3. The highest level of integrity is expected, when in doubt ask.
4. Learn to be a good business person, not just a good salesperson.
5. Everyone sweeps the floor.
6. Be professional in your style, speech, and follow-through.
7. Listen to the customer, they almost always get it.
8. Create win-win relationships with your partners.
9. Look out for each other, sharing information is a good thing.
10. Don’t take yourself too seriously.

If you like this kind of thing, check out my learnings from Jeff Taylor, the founder of Monster.com, speak at M.I.T. a few months ago.