In this sixth installment of my Wall Street Profiles series, I discuss the investment career of Donald Trump, real estate mogul and the 45th President of the United States.
His business and political career has been not without controversy, to put it mildly, but I think his success illustrates some principles on how money is made in real estate, which is very different from how it is made in the stock market.
Introduction
Donald Trump grew up in Queens, NY, the son of a prominent real estate developer, Fred Trump. He took over the family real estate business and grew it substantially through investments in commercial real estate, golf courses, and licensing deals. He later became a reality TV star on the Apprentice and its spin-off series. Without any prior political experience, he announced that he was running for President in 2015. He beat out more than 15 Republican challengers and the Democratic nominee, Hilary Clinton, to become the 45th President of the United States.
Major Transactions
Trump Tower – 1978-1983
Donald Trump’s most famous real-estate holding is the Trump Tower in midtown Manhattan. There is a mix of retail (Gucci currently has its flagship 5th Avenue store there) and residential tenants (with Trump’s family occupying the penthouse condominiums before they moved to the White House).
According to Forbes, the building is currently worth $351 million, and with $100 million in debt, Trump derives $251 million in net worth from the building.
Mar A Lago – 1985
Trump got into the golf course business in the 1980s, building the Mar-A-Lago resort in Palm Beach, FL, in 1985. It’s a private country club, with initiation fees reportedly being $200,000. Trump owns 100% of the club, which is currently worth $160 million.
Atlantic City Casinos
Despite his boasting, not every business deal Trump has made have been successes. His companies have declared bankruptcy six times in order to restructure debt, although Trump has never himself declared personal bankruptcy.
His biggest failures as a real estate developer and businessman have been with his Atlantic City casino investments. He has invested many times in Atlantic City since gambling was legalized in the 1970s. He most famously built the Trump Taj Mahal at an expense of $1.1 billion. After opening in 1990, the casino went into bankruptcy in 1991 and then again in 2014, before closing in 2016. The site was purchased by an outside developer and currently is being renovated and re-branded as the Hard Rock Hotel and Casino.
Current Net Worth
While his net worth is up for much debate, Forbes estimates his net worth in 2017 to be $3.1 billion dollars. They have broken down his net worth into his various investments, including $1.6 billion in NYC real estate, $500 million in other real estate, $570 million in golf courses, $200 million in brand business, and $290 million in other assets.
Takeaways
Real estate is different from the stock market
The stock market is very efficient, with millions of participants all trading the same securities. It’s very difficult, if not impossible, to consistently beat the stock market.
Real estate, on the other hand, is not as efficient. The number of people looking at your typical residential property is relatively small, and most are just regular homeowners, not professional investors. Experienced real estate investors often will be able to make money at the expense of regular homeowners.
Real estate investing is a combination of business, law, and politics
While there are many, many people who dabble in residential real estate investing, only a select few are able to work on big commercial development projects. Besides being a massive undertaking to construct or renovate these skyscrapers worth hundreds of millions of dollars, there is a maze of permits and approvals required for any big construction project. Being politically connected can help you cut through the red tape.
And when a real estate deal goes bad, investors will seek the shelter and protection of bankruptcy laws. At that point, real estate becomes more of a legal game than a business game, and having good lawyers can help you maximize the money you win or lose in a distressed debt situation.
Leverage can make you or break you
All the real estate moguls use significant leverage to build up their empires. No one pays cash only for big multi-million dollar developments. Sometimes, they push the envelope too far, and projects end up in bankruptcy. However, real estate moguls usually wrap their investment deals within companies, enabling them to minimize the dent on their personal wealth if a deal goes bad.
They often will treat bankruptcy as simply a legal maneuver to help them negotiate and restructure their businesses. Trump told Newsweek in 2011, “I do play with the bankruptcy laws—they’re very good for me.” Donald Trump has used all the legal and accounting tools at his disposal to get wealthier.
Net worth is a little nebulous when you have real estate and business stakes
Forbes estimates Donald Trump’s net worth to be $3.1 billion in 2017, but that’s just an estimate. Unlike with a stock portfolio that can be easily liquidated, Donald Trump’s real estate portfolio could not be easily unwound and liquidated for cash. As a result, it’s very difficult to get a precise estimate of his net worth.
Conclusion
Donald Trump became a billionaire in real estate by successfully navigating through the business, tax, legal, and political worlds. Real estate, unlike the stock market, is a game that can be beaten, but it takes a combination of skill, effort, luck, and connections.
What do you think? What has made Donald Trump so successful in the real estate world? Can it be replicated by ordinary investors?
Nice round up of our current presidents holdings…the man does have a ton of wealth…and is currently president of the US. Wild.
Political views aside, I’m just going to leave these here for you to mull over.
https://www.moneytalksnews.com/why-youre-probably-better-investing-than-donald-trump/
https://www.forbes.com/sites/katestalter/2016/09/01/would-donald-trump-be-better-off-investing-in-stocks/2/
http://fortune.com/2015/08/20/donald-trump-index-funds/
https://www.bloomberg.com/view/articles/2015-09-03/should-donald-trump-have-indexed-
https://dqydj.com/donald-trump-beat-sp-500-index-funds/
https://www.vox.com/2015/9/2/9248963/donald-trump-index-fund
Essentially the math depends a lot on how much he actually inherited and in what form, and when he’d have invested. At best he barely outperformed the S&P 500 over his entire career. At worse he underperformed, particularly since 1982 when the stock market started to take off.
Of course, that does neglect spending (and he’s a big spender, obviously) so I’ll give him the benefit of the doubt and say that while he’s been a successful RE investor, he’s not been nearly as successful by comparison as I think he’d like to make it seem.
That being said it’s clear that he knows what people he’s talking to want to hear, and I have no doubt that’s helped his business endeavors as well.
I don’t think I’d even argue he’s a good investor. He’s a good transactor. Ie his investing style seems to be less about the long run hold and more about negotiating the best deal possible when purchasing a real estate investment. It’s a different skill set for sure for better or worse. He’s good at limiting his down side and inbounding his upside in a negotiation.
Donald Trump has been successful in business in the exact way I hope never to be. Screwing anyone he can, being disingenuous to lenders and investors, and serving #1 before anyone else. His reputation in the business world is terrible. The last time he tried to bring debt in the public markets the investment banks couldn’t even fill his meeting schedules. And then he refused to shake hands in meetings and requested private elevators. No one was interested in lending to him.
Do you want to play with bankruptcy laws? That’s fine. You can win, once or twice. But lenders have good memories and you’ll shut yourself off from that source of capital, or at least end up making any debt issuances cost you a LOT more, in the long run.
WSP
Interesting article. Personally I like Trump. He’s a creative disrupter, and in my opinion creative disruption is the driving force behind economic growth. Examples Amazon Apple Google. He’s also fearless. It’s hard to tell what he’s really like because it’s all so wrapped in narrative and spin.
The best take away from this article is some notion of the intangible risks in real estate investing. I own a home but I have read the net to the portfolio is -1% all things taken into account. My experience is this is probably so.
I’ve seen a new real estate product pop up called “crowdfunding” and it seems all the rage BUT it looks extremely risky to me. It’s a limited partnership, with not much partner control especially on the cash flow, in an illiquid asset, with no good exit strategy. You send your dough to someone 10 states away to fund a property 6 states away. There are all kind of ways to scam this scenario. Do you have an opinion on this? To me it’s a variant on the “Timeshare” scam and you don’t even get the steak dinner.
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