This idea came to me while reading a book called “The E-myth”. One section in particular describing Ray Kroc’s main insight from McDonalds was that he wasn’t in the business of selling hamburgers, he was in the business of selling McDonald’s the business to other business owners ( franchisees ). Obviously the main idea here is that as a small business owner, you should be thinking about the business as a whole as the main product. Working on the business, not in it. ¹

But this got me thinking about the business of buying real estate as an investment.

The majority of people think about the real asset business model in terms of: buying an asset that generates income by either people renting it out, thereby producing yearly cashflow, or by selling it to a new owner for more than you bought it. Which is why the majority of homeowners think of their home as an investment. I’ll buy in a desirable area, renovate the kitchen, and someday it will be worth more than when I bought it! Is the typical thought process.

That’s certainly part of it. The intuition is correct, eg, buy low sell higher.

But how high?

When people talk about “the real estate market”, ultimately they are talking about a marketplace where money is exchanged for property. And what group of people has the most amount of money to participate in this marketplace? Investors.

Therefore, when you’re buying a piece of real estate, your real customer is the future buyer. Private equity firms and other real estate investors understand this. That’s why the underwriting of a deal is actually where the money is made.

The main insight being: You should be thinking about selling, and who you’ll be selling to, while you’re figuring out how much you’d want to buy it for

Analyzing your exit scenarios with this in mind now becomes lot more grounded in reality.

There are a ton of other insights to gain from doing your underwriting from the perspective of the future buyer and will completely change which numbers to focus on.