Young Guns Capital Corp.
Nicolas Cage, Walmart and Buying Real Estate for less than $300
Updated: Dec 18, 2020
You can print money, manufacture diamonds, and people are a dime a dozen, but they'll always need land. It's the one thing they're not making any more of.” - Lex Luthor, Superman Returns
Lex Luthor, the archenemy of Superman, always had a thing for real estate. In the 2006 film, Lex's plan was to destroy the United States, replacing it with a large continent and forcing the rest of the world to live there. In the 1978 Superman movie, Lex put a nuclear warhead to the San Andreas fault to cause an huge earthquake that would have dropped California into the sea. This would have greatly increased the value of his recently purchased Nevada desert property. Beachfront property is always expensive. In Superman II he wanted Australia. This guy thought big in terms of real estate investing but it’s a good thing for humanity he failed every time.
Film actors are generally not good with money and investing. Nicolas Cage was a top movie star in the 1990’s and early 2000’s. He starred in action blockbusters such as The Rock, Con Air, Face/Off, National Treasure and Ghost Rider. He was one of the highest paid actors at the time. He won an Oscar and was considered to play Superman in an upcoming movie.
The problem was he was a spender and not a saver. The one-time Hollywood leading man spent millions on 15 luxurious real estate properties around the world including apartments on New York's Fifth Avenue; three castles (including an ancient Bavarian castle in Germany); a home in Beverly Hills, California; a townhouse in England; two islands in the Bahamas and a haunted house in New Orleans. How does a house of a former serial killer come into a real estate portfolio? He also spent his fortune on exotic cars (including 9 Rolls Royces), four yachts and weird items such as a dinosaur skull that cost $300,000.
Back in 2007 everyone was buying real estate then the global financial crisis hit and real estate prices crashed. Cage was in serious debt and had cash flow problems. He didn’t make loan payments and stopped paying taxes. Cage ultimately declared bankruptcy in 2009. Strange because according to Forbes magazine he made $40 million that year. Perfect example of cash flow issues. Never spend more than you make. He bought at the top of the real estate market and was forced to sell at the bottom. This is how most people lose money in real estate investing.
Arnold Schwarzenegger on the other hand actually became a multi-millionaire from investing in real estate by his mid 20’s. Most people don’t know this. In the early 1970’s Arnold arrived in California and didn’t want to rent out an apartment. He had money saved up from bodybuilding competitions and decided to use it as a down payment to buy a six unit apartment building. He wanted an income producing property so he could train and go to school full-time (he has a degree in business administration). He lived rent free in apartment number 6 and rented out the other five units.
“I put down money for an apartment building. I realized in the 70’s that the inflation rate was very high and therefore an investment like that is unbeatable. Buildings that I would buy for $500K within the year were $800K and I put only maybe $100K down, so you made 300% on your money. I quickly developed and traded up my buildings and bought more apartment and office buildings.” - Arnold Schwarzenegger
Since Arnold was rich he was able choose his film roles instead of taking any role that came his way. This is rare as most actors struggle with money and will take any roles to pay their bills. He didn’t become a Hollywood action star until his mid 30’s. The rest is history. Today his net worth is about $400 million.
The Terminator grew up dirt poor in a house that didn't have hot water or electricity. Nicolas Cage grew up in a rich Hollywood family which included famous actors, producers and the legendary Hollywood director Francis Ford Coppola who made the Godfather movies. Nicolas Cage’s last name is actually Coppola. He chose the last name Cage as a tribute to comic-book superhero Luke Cage. He attended Beverly Hills High School but dropped out to act in films.
“Formal education will make you a living: Self-education will make you a fortune.”
- Jim Rohn, American businessman, a self-made millionaire before he turned 31.
Unlike day traders, successful real estate investors are long-term oriented, focus on income, and wait patiently for appreciation. To be successful you have to be aware of what is happening in the economy. Arnold Schwarzenegger was a perfect example of this. Nicolas Cage was not.
Interest rates have been dropping since the 1980’s this has been great for real estate investors. In 1981, mortgage rates peaked at more than 20 percent. By 1990 they were about 12 percent. Today somebody can get a mortgage for under 2 percent. Low interest rates are important for real estate investors as they keep the bank loans and mortgage payments low. Generally, the lower the interest rates go the higher the real estate prices spike (unless you are in Alberta or states with high unemployment). Successful real estate investors pay attention to interest rates.
If you walked into a Real Estate Agent & Mortgage Broker convention and told the crowd the Bank of Canada (Federal Reserve in U.S.) suddenly raised interest rates to 4 percent from 2 percent you would give most of attendees heart attacks. Many real estate investors would go bankrupt overnight. The Bank of Canada generally raises interest rates .25 percent at a time. Slow and gradual increases or decreases.
Smart real estate investors like Arnold also pay attention to inflation. In the 1970’s and 1980's, the rate of inflation averaged just under 10 percent, but since 1992, the inflation rate has generally stayed around 2 percent. If the inflation rate rises then the Bank of Canada could start raising interest rates to try to bring it down. Low inflation is important to people because it has a substantial impact on prices for the things we pay. Imagine if the price of Big Mac went up by a dollar every year. People would not be happy. Real estate investors would be happy because the value of their buildings would go up every year making them rich like Arnold. Inflation numbers also help determine how much to increase the rents by every year. They will lose money if inflation hits 10 percent while they only increase rents on their properties by 2 percent.
Would you like to own property? A second house? Maybe a small strip mall or commercial building? There are a lot of terms you need to know in addition to interest rates and inflation. You would need to know what leverage, triple net, cap rate, net operating income, CapEx, appreciation, equity, debt-to-equity, mortgage, MLS and cash flow are. The word cash flow shows up in a lot of articles on this blog.
People can lose everything with real estate investing since it requires so much capital and leverage. Leverage in real estate is using borrowed money to buy a property. The use of leverage in real estate investing amplifies both profits and losses, and thus increases risk as well as expected return.
With leverage, you put 10 percent of your money down on a property and borrow the other 90 per cent from the bank. This is how Arnold made a fortune in real estate when California property values were going up 20 to 30% a year in the 1970’s. Nicolas Cage’s Bel-Air, California mansion was worth $35 million just before the real estate crash. It had a total of $18 million dollars in loans. Due to unpaid loans the bank sold the house to a new owner for $10.5 million in 2010. Remember Cage had 15 properties and most of them had loans on them. It unraveled fast. Leverage can make or break you.
There are people like Garth Turner, an investment advisor who has also made money off real estate, who regularly brings up the harsh truth about real estate investing:
“You need diversification. Real estate is like every other asset class, prone to fluctuations. If you put all your net worth into one property at one location in one city, you’re courting risk. That could be from macroeconomic events (a recession, rising interest rates) to the micro (the guy next door starts a meth lab or the city approves a cell tower across the street).
Consider how to best weather some kind of economic storm. Houses (investment properties) become illiquid fast. Financial assets, in contrast, can be liquidated in seconds giving you instant cash. Investment portfolios don’t need to be insured but real estate does. There are no property taxes, closing costs when you buy or fat commissions when you sell. No maintenance. No grass-cutting.”
What if you could invest in real estate the same way you invest in dividend paying stock? The main objective of this article is not to argue with the HGTV viewers (where nobody ever loses money in real estate) or family members who are realtors. We are here to discuss how to get into real estate investing for under $300 so we are going to focus on blue chip stocks with significant real estate exposure and real estate investment trusts.
You need to watch The Founder on Netflix. Ray Kroc, responsible for McDonald's growth, has famously said that “They're in the real estate business, not the hamburger business.” He was deep in debt despite McDonald's early success when he realised that “You don’t build an empire off 1.4% cut of a 15 cent hamburger. You build it by owning the land upon which the burger is cooked.” Check out this clip from the movie:
McDonald's owns the land and buildings at most of its locations. The franchisees pay it rent. This gives McDonald's more control over its franchisees and provides an even more stable revenue then franchise fees. You always have to pay the full rent even if sales are down. The banks love lending you money if you have real estate assets so there is no limit to growth.
Today McDonald's has nearly $30 billion in real estate holdings, making it one of the largest commercial real estate owners in the world.
McDonald’s is one of largest fast-food chains. According to McDonald's Corporate, it has more than 38,000 franchise locations around the world. The company operates in 120 countries and opens an average of 600 new locations each year. As a result of that focus on real estate, the company hauled in $7.5 billion of rental income in 2019, which was slightly more than a third of its total corporate revenue of $21 billion.
McDonald's Stock Info
2005: $33 2020: $213
Annual Dividend Per Share
2005: $0.67 2020: $5.16
*McDonald's has raised its annual dividend for 44 consecutive years since paying its first dividend in 1976.
Walmart is another retailer that prefers to own its real estate.
On July 2, 1962, Sam Walton opened the first Walmart store in Rogers, Arkansas. Walton’s strategy was to dramatically cut prices on all products (reducing profit margins) to get customers into his store which would then lead to higher sales and profits. People buy a lot of products when they are on sale. In the early days, Walmarts were initially located in small towns instead of large cities where the established competitors operated. Walmart grew fast and competitors didn’t notice until it was too late.
In 1985, Forbes magazine pronounced Sam Walton the richest man in America, with an estimated worth of $2.8 billion. Walton was famously frugal and still drove a 1979 Ford F-150 pickup truck. The steering wheel was chewed up by his dog. According to Bloomberg, the Walton family today is one of the wealthiest families in the world with a combined fortune of more than $200 billion.
Walmart is one of the most successful and profitable retailers in the world. Walmart's 2019 total revenue was $524 billion. The company has over 11,400 store locations around the world. The average Walmart generates approximately $1 million a week in sales. Their competition doesn’t even come close.
How did Walmart get into owning real estate when most retailers prefer to lease? Sam Walton was a highly successful retailer before he opened his first Walmart but was burned on a lease on his very first store as he didn’t read the fine print. He neglected to add a clause in his lease that would give him the option to renew the lease. Walton’s store was profitable but the landlord refused to renew Walton’s lease. He took over Walton’s store and transferred it to his son. The Walton family was devastated. This experience caused the company to greatly prefer owning rather than leasing. Walmart now owns 85% of the real estate of its US stores and distribution facilities. It also owns more than 50% of its international stores and distribution facilities (more on this later). Walmart’s real estate division rents out store space at Supercenters to McDonald's, banks, other other small businesses & finding new uses for former Walmart stores.
According to Walmart’s website, 90% of Americans live within 10 miles of a Walmart store. Almost 40 million people shop at Walmart every day. Location! Location! Location! This is one of the reasons Walmart has been able to weather the Amazon online sales storm when many traditional retailers such as Kmart, JC Penny and Sears have declared bankruptcy. If you don’t want to wait three days for your video games to arrive from Amazon just drive five minutes to the nearest Walmart and buy it ASAP.
Walmart Stock Info
2005: $45 2020: $150
Annual Dividend Per Share
2005: $0.52 2020: $2.16
*Walmart has increased their annual dividend every year since first declaring an annual dividend in March 1974.
If you don’t want to own stocks and want pure play real estate companies then you should look into investing in Real Estate Investment Trusts.
Real Estate Investment Trusts (REIT) are diversified portfolios of income-producing properties. Some REIT’s specialize in apartments, storage facilities or even shopping malls. According to Forbes, REITs are basically “pass-through” investments: management collects the rent, keeps enough money to pay for maintenance, possibly expansion, and to keep the lights on, then hands the rest to shareholders as dividends. Some can provide capital gains.
A REIT trades similarly to exchange-traded funds or stocks. Unlike your house or the strip mall you own, you can see the value of your investment fluctuate in real time. For ultimate diversification you can buy REIT exchange traded funds (ETF’s).
The Vanguard REIT ETF, invested in about 145 different REITs, recently had an overall dividend yield of 4.1%. The Vanguard REIT ETF has averaged 8.4% annually over the past decade, outpacing the S&P 500's 7.8%
XRE is a Canadian REIT ETF. XRE provides exposure to approximately 16 REITs across several subsectors in Canada. It has a dividend yield of 5.7%. Its average annual return is just over 10% a year. Management expense ratio of 0.61% a year is pretty decent. Most real estate mutual funds charge about 2.5% in management fees.
Maybe you don’t want to own a REIT ETF. You might think that you could generate higher returns if you owned a single REIT. I guess that is more diversified than owning one property on a single street in a city.
SmartCentres Real Estate Investment Trust is one of Canada’s largest REITs, with over 160 strategically located properties in communities across the country. There is a major one in our city. SmartCentres has $10.4 billion in assets and owns over 3,500 acres of land across Canada. More than 100 of the centers are Walmart anchored shopping centers. Anchors like Walmart are important because other retailers will decide to lease space close by depending on the anchor tenet. Strong anchors drive traffic so retailers are willing to pay more to be close by. Dollarama, the largest operator of dollar stores in Canada, likes to be located close to Walmart so it has been absorbing surplus space at SmartCentres recently. Walmart accounts for about 25% of the company’s total rents. According to SmartCentres website, 76% of Canadians live within 10 km of a Walmart. Other tenants include: Canadian Tire, Winners, HomeSense, Superstore, Shoppers Drug Mart, Lowe’s. They are diversifying and moving into retirement homes & self storage facilities.
As per their 2019 Annual Report, the REIT has delivered 15.8% average annual return since 2002. That is impressive! Hopefully they can continue with those gains. Time will tell. They are growing, they have steadily increased their rental revenue and assets.
In Superman Returns, Lex Luther was already extremely wealthy after his ultra rich elderly wife passed away leaving her fortune to him. He was sailing around in a $100 million dollar yacht that had a helicopter pad. He should have given up on his insane real estate plans for global domination and just invested in real estate stocks and REITs. He could have enjoyed the rest of his life making money off dividends and capital appreciation. Instead he took on Superman, who is literally an alien god, and lost. Nicolas Cage is a huge Superman fan, he even named his son Kal-El (Superman’s birth name). Come to think of it maybe Cage should have played Lex Luthor in the movie.