Exclusive Interview: Real Estate Investor Paul Habibi Shares His Playbook

paul-habibiPaul Habibi is a savvy guy. Immediately after undergraduate school he started funneling his excess earnings into small real estate investments. As a result of playing by tried-and-true rules and hitting the right time in the real estate cycle, Paul and his brother ultimately quit their jobs and went into investing full-time.

Paul is Principal and Co-Founder of Habibi Properties, LLC, one of the largest private multi-family housing owners in the Los Angeles metropolitan area. He also teaches real estate to MBA and undergraduate students at UCLA’s Anderson School of Management. I caught up with Paul to hear his exciting story and learn the secrets to his success …

Damien Hoffman: Paul, how did you get started as a real estate investor?

Paul:  Right after undergrad, I started investing in real estate as a hobby.  I starting buying very small income producing properties — single family homes.  In fact, my first deal was a single family home.

My market timing was very fortuitous because around 1996 real estate was coming out of a recession and prices started increasing year over year.  I was able to refinance properties, sell properties in very short order, then organically accumulate a fairly decent sized portfolio within a few years.  I continued that investing pathway in parallel to having full time jobs.

After undergrad, I worked full-time at Arthur Andersen as an auditor in the real estate and financial services division.  I was at Arthur Andersen for about four years.  Then I did a little stint with the Walt Disney company in corporate finance and transactions.  Following that, I started a consulting firm which I later sold.  Then I went to business school at the University of Michigan.

During that time my brother and I were investing in properties.  We had a handful of multi-family investments, but it certainly wasn’t enough to warrant a full-time career.  However, when I graduated from business school we realized that we actually had enough of a portfolio to devote our all our time and efforts to real estate investing.  So, we continued to organically grow our portfolio and also started syndicating deals and raising capital from outside investors.  That’s when the scale really started to escalate.

Damien: You got the catalyst from leveraging with other people’s money.

Paul:  Exactly.  Obviously, the whole capital structure tends to grow once you start utilizing outside equity because not only are you expanding your equity base but you’re also expanding the debt that you can take on.  Thus, acquisitions and your overall capital base continue to grow so long as you’re doing things right.

One very fortunate thing for us was that while growing the business organically during that passive period of about six years, we had been used to slow growth mode.  So, when we started raising money from outside equity sources, we didn’t fall into the trap that a lot of syndicators do: going on an acquisition binge.  We didn’t go on an acquisition binge.  We didn’t over lever ourselves.  So, when the market naturally came crashing down, we were left with only a modest level of exposure to some of the maladies that other investors had and are continuing to face now.

Damien: Obviously, a lot of people did not navigate the credit cycle very well.  Rewind back to 2005. Things heating up and Flip That House is rising up the TV charts.  What are you guys doing with your business at that point?

Paul:  At that time we actually started taking a little bit of fast growth equity off the table.  For example, we had a lot of development deals that were in midstream.  Rather than completing those development deals, we actually started selling entitled land.  The process of developing a parcel usually takes anywhere from two to four years.  Somewhere around the one or two year mark you’ve gotten your entitlements and all your permissions to build from the city.  The next half of your time is spent in the actual construction of the project.  Of course while constructing the project you’re a prisoner for market risk because you’re sitting there with either a hole in the ground or a semi completed project.

So, we would assemble and entitle the land, then sell to somebody who actually wanted to take the construction and market risk from us.  That was fairly fortunate because we were able to take those proceeds and in many cases invest them in more stable properties like apartment buildings.  We did that with somewhere in the neighborhood of fifty-five to sixty-five percent loan to value such that we had sufficient operating income to fulfill our debt obligations even if our incomes on the properties were to fall precipitously.

Damien: So, did you see the entire collapse coming?

Paul:  A lot of people like to claim they saw it coming and they knew exactly what was going to happen.  Our sentiment was that purely on an evaluation basis, the yields on real estate had fallen to unreasonable levels.  Thus, we thought it might make sense to start hedging our bets and playing it a little bit safer.

We’re holding all our assets now. I wouldn’t say we’re getting any richer in real estate at the moment.  But, we’re definitely not encountering a lot of the problems that most investors are.

Damien: How do you manage a portfolio in a scenario where the outlook for a property is extremely cloudy?

Paul:  We’re trying hard to extract maximum value from our existing portfolio, control costs, or be very accommodating to tenants who in many cases are struggling to make ends meet.  There’s a lot of inward looking focus right now.

My overall outlook for real estate has always been and continues to be optimistic.  However, it’s very important to know that real estate is a cyclical business.  Development is extremely cyclical.  In every decade you probably get two to three good years of development and then the rest is a drought.

The name of the game is to have staying power over those cycles.  If you’ve witnessed the last three or four real estate cycles, you’ve seen all the guys who take big bets get really rich and then lose their shirts.  Whereas the investors who tend to weather the storm play it safer and adhere to certain rules in the real estate game that tend not to change.  Most people don’t abide by those rules.  Therefore, the good news about real estate is that it’s a very simple business and the rules seldom change.  The bad news is that nobody listens to those rules.