October 22, 2019

JF1875: Real Estate Titan Educates Us On Development Deals with Erez Cohen


Erez is on the show today to tell us his real estate investing story, which has included a few different roles and strategies. These days Erez focuses on development deals so we’ll take a dive into his role with those deals. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

“If you want to start real estate investing, your work ethic matters more than your knowledge” – Erez Cohen

Erez Cohen Real Estate Background:

  • Real estate investor and author
  • Has taken part in over $3.5 Billion worth of real estate deals, author of the book Real Estate Titans
  • Based in Mexico City, Mexico
  • Say hi to him at https://www.linkedin.com/in/erezcohenh/
  • Best Ever Book: Principles


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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Erez Cohen. How are you doing, Erez?

Erez Cohen: Doing well, Joe. How are you?

Joe Fairless: I am doing well, and looking forward to our conversation. A little bit about Erez – he is a real estate investor and author. He’s taken part in over 3.5 billion dollars (that’s with a B) worth of real estate deals. He’s the author of the book Real Estate Titans. Based in Mexico City, Mexico. With that being said, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Erez Cohen: Yeah, Joe. Thanks. I’m very happy to be on your show, thanks for having me. It’s a pleasure to be talking to your audience. About 14-15 years ago I started working in real estate full-time. I’ve always been enamored with real estate since I was a young kid. I had two sisters who were architects, so I was always exposed to seeing the creation, and buildings, and homes, and neighborhoods, and cities. To me that was just always something really wonderful, and so I always wanted to be in real estate.

I started on the financial side, so on investing, and then more recently I’ve moved to the development side, and it’s a lot of fun. I love it.  It always keeps you busy, and it’s really a wonderful business.

Joe Fairless: Well, if you’ve moved to the development side, you’re certainly staying busy… So educate me on what you’re doing from a development standpoint, and we’ll go from there.

Erez Cohen: Sure. Like any other field in industry, you always try to look for a supply and demand imbalance. Currently in Mexico and Mexico City a very interesting segment to focus on is residential [unintelligible [00:03:05].05] Mexico City is truly a verticalized city, so we have to go up… And we’re currently focused on doing residential projects targeted for the middle sector in Mexico. GDP per capita here is about a fifth of what it is in the U.S, so very different price points… But building apartments for anywhere between $150,000 to $300,000. Usually, financing is readily available for buyers, and also for developers. So keeping busy on that side…

Also, looking at some mixed-use property. In today’s world it’s really a live-workplace leap; everything together, in the same place… So we’re trying to add some component, some retail, maybe a little bit of co-working office etc into these projects as well.

Joe Fairless: Let’s go back a little bit… What was your background before you got into real estate about 14 years ago?

Erez Cohen: I was never 100% sure which field within real estate I wanted to be in, so I focused on business administration and pre-law. I did some summer internships in law firms and investment banks. It was all really interesting, but I definitely decided that I did not wanna be a lawyer… So I did that, and then I started working full-time in an investment bank, in the real estate group. It was a really interesting challenge. For those people listening who work on Wall Street and investment banking – it’s a wonderful learning experience, it’s not such a great lifestyle. You’re working between 80 to 100 hours a week, but at the same time it’s a phenomenal learning. We can go into the discussion whether school and education really prepares you in today’s world for financial and professional success. My opinion is it does not. But when I was in investment banking, I felt it really taught me a lot of important skills that I needed.

I also believe that if you start your career off with something really challenging, I think that’s wonderful, because life unfortunately (or fortunately, whichever way you look at it) is really a big challenge. So the more arduous endeavors you go through at a younger age, I think the better that prepares you to deal with the inevitable challenges that will come up later.

So I did investment banking for a while, and then I was able to jump to the investing side. So I worked then for a large private equity fund, focused on real estate investing. And you’re kind of on the sell side in banking, and then you’re going to the buy side when you’re in a private equity, and it’s also really interesting – it also teaches you a lot of transferable skills… But I’ve been asked “If you could go back to school/university, what would you study?” Honestly, I think that there’s a lot of  different fields, and there’s so many different entry points in real estate, as you know, Joe, that I do think that there’s a lot of different things that one can find passion for, whether it’s economics, or pre-law, or architecture, or civil engineering. Whatever you decide to study and wherever you decide to go, I think that there’s always those leaps that are available. I don’t think that if you study civil engineering you can’t go work on Wall Street in a quantitative job.

Everything throughout my life, and I’m sure throughout your life and a lot of the people listening – we’re always told that “Hey, you know what – it’s too hard. You can’t do that leap. You can’t go that way, you can’t do this, you can’t do that…”, and it’s important to never listen to these limiting beliefs. We’re surrounded by people that have these limiting thoughts, that tell us what to do.

So I’d say that if you have some people that are looking to start maybe a career in real estate or to further their career in real estate – it doesn’t matter so much what you’ve studied, what matters is your will, your hunger, your values towards hard work etc. If you have those things, I think you’ll be able to do whatever it is you want.

Joe Fairless: 80 to 100 hours  a week working in investment banking you said was a phenomenal learning experience. What are some specific things that you learned?

Erez Cohen: First and foremost, you learn the value of hard work, and I think that’s really important in life. I would say that in general – and that’s in banking or in any other very tough job, with these types of long hours – most importantly what you learn is the qualitative things. It’s interacting with other humans, leadership, teamwork etc. It’s kind of like the softer things, because obviously, you’re gonna learn a lot of technical things… I would say that in order to succeed in life, the technical skills in my opinion are important, but they’re not that important.

So if I’d have to throw out a number, maybe 30% of the things that I learned were technical skills, financial modeling side, so you do a lot of Excel proformas… In real estate we have ARGUS, as many of your listeners probably know. You also do a lot of presentations, like pitch books, offering memorandums etc. Sometimes you do capital raising on the equity side, so maybe IPOs (initial public offerings), and then you might be on the debt side, helping your clients raise debt… All these things are great, and you’ll learn a lot about them, but you can also read a lot about them. But I’d say the better experience comes on the softer side of just you interacting with everybody else, and you learning leadership skills, teamwork skills. I think that those are super-important and I’d say that’s probably the biggest thing that I take away from that… Because it’s almost like being in the army. If you go through an IPO, like a year and a half’s work, for example, you’re traveling the world trying to raise money for your client, it’s almost like you went to war.

You and your colleagues were in the trenches, staying up till 5, 6 AM, having an hour’s sleep, going back to the hotel, showering and going back at it. All these things are just overall a really good experience, especially if you get them at a younger age.

Joe Fairless: What are some leadership fundamentals that you believe in order for someone to be a good leader?

Erez Cohen: That’s such a great question, and there’s so many wonderful people out there who do have probably much better responses than I do, but I’d say the first and foremost thing in my opinion is understanding very clearly what are your assets and what are your values, and if you live according to your values and you’re congruent. For example, you might yell at somebody for doing X, and then you do it yourself – I think that’s very incongruent, and in life and in any industry anywhere in the world you see this a lot.

I do believe that you have to have your values very clear. I think that both this simple, basic common sense to just treat everybody else as you’d like to be treated. On Wall Street I’ve seen from my career a lot of people that when they’re analysts, they’re starting out, they have a really tough time with their bosses, and their bosses’ bosses… They get treated very badly, so what they do is that eventually when they’re in more senior positions, they treat their analysts in a really bad way. And I think that’s just a really sad thing to see.

So for me, it’s always about treating your team very fair, very good, and taking care of business… I mentioned this in the book I wrote – I think that something wonderful… Anybody who can read Dale Carnegie’s “How to win friends and influence people” – he has so many really good points there, really valid points that I have seen throughout my life, that are really truthfully things that if you inculcate/integrate them into your life, you should be able to find a lot of success. It’s just about being a good person, being a nice person, and obviously, important skills that come with being a leader… But I’d say in general those are my main recommendations.

Joe Fairless: You mentioned that this career path helped condition you for the challenges that come up throughout life… What is a big challenge that has come up for you in your life?

Erez Cohen: Every human on Earth has challenges, and many times we think that our job – especially if we live in the Western world – and our professional life is the most important thing. We’re always focused on those challenges, and it’s not until you get something happen to you on the personal side, whether it’s (God forbid) a disease that you get, you or somebody close to you, or some other type of personal thing that might happen, some type of tragedy… So I think that that’s really when everything balances out.

So I’d say that I’ve had a lot of personal things come up to me, diseases with different people close to me and my family, and including some loves ones – that is always definitely a bigger challenge than anything professionally. And of course, like everybody else, we have a lot of professional challenges; depending on the economic environment, you always have things that you’d never think will come up, that will come up… And I’d like to also just put a parenthesis to this answer and say that this book that I wrote, called Real Estate Titans – what I did in this book is I went and I interviewed 11 real estate titans from around the world, people that are super-successful professionally, personally, and in so many other aspects, and I asked them this question, about their challenges… And it’s the craziest things that one can never imagine that will come up. It’s almost like Murphy’s Law – whatever can go wrong, will go wrong. These are the types of things that you have to be ready for.

So that’s why, in my opinion, and going back to what I said about challenges – you have to be mentally strong to get ready for any challenge that might come up… Because you never know what might come up. And I know, Joe, you probably lived through this many times in your life and you know this, but — we never know, so I feel like it’s super-important to be mentally strong and perseverant. And also, I’d say — sorry for the fluff here; it sounds corny, but it’s true… I’d say try to surround yourself with people that are just optimistic in general about life, because they keep you motivated, they keep you inspired… And if you yourself can do that every day, you have to work on it; you have to start your day off doing different things. But if you can be optimistic, I think in general it’s great, because you always need that in order to deal with those challenges that will inevitably come up.

Joe Fairless: So now let’s transition a little bit into the development projects that you’re working on. Are they all in Mexico City?

Erez Cohen: Yeah, most of them. There’s one deal that we’re looking at in South Florida, Miami, but yeah most of them are in Mexico City.

Joe Fairless: Okay.

Erez Cohen: As you guys know, real estate is a very, very local business. Building in Miami is very different than building in L.A, and very different than building in New York. You have different state laws, and tax issues… So in Mexico City I can tell you that probably more than in the U.S, and perhaps we can make this a more macro conversation – kind of like the developed world versus the emerging market world, Mexico obviously being in the emerging market world and the U.S. being the developed world… In an emerging market it’s much tougher to get permits and licenses, so it’s a much longer process. At the same time, the positive thing about that is that as you look at the ground-up development value chain, you’re dealing with the biggest risks upfront; you put less money, and I think that’s something better.

In this case, the biggest risk that you would have if you build any type of building, or shopping center, or whatever, anywhere in Mexico, it’s gonna be the permits and licensing. So if you can deal with that successfully and you can get all the dozens of different permits and [unintelligible [00:14:05].25] that you’ll need, then after that you’ll be in a much better position.

Another thing that we try to do is I asked a few years ago — I love learning from really successful people; one of Latin America’s probably most successful developers – I asked him throughout his career what was the most important thing that he’d learned from developing all these projects, and he said “Learning what it’s gonna cost me now.” Because Joe, I’ve been throughout my career maybe in  50 different projects, involved in them, and I could tell you that one of the main things when you’re doing ground-up development is getting the budget correct.

Joe Fairless: Yup.

Erez Cohen: There’s almost always – I’d say maybe 95% of the time – cost overruns. So because of that, one of the things that we’re trying to do is get the GMTs (guaranteed maximum prices) in place. There’s a lot of different construction contracts, and it’s totally important to learn them. You’ve gotta look at the open book, and you’ve got the lump sum contracts etc. (we’ll go into that), but what we’re trying to do is today, before we even build the building, know what it’s gonna cost us. So depending on your construction scheme, if you’re hiring a GC (general contractor), let’s say Beck [unintelligible [00:15:16].15] (there’s so many out there), but whoever you decide to hire, then you’ve just gotta make sure that they’re also taking the risk.

In any type of business – and in real estate it’s no different – you always try to have all parties do well. In this case, “Hey, you know what, GC? If you’re gonna come in with us, you’re gonna get all this potential upside… You’ve also gotta have potential downside. So you’re gonna tell me today what it’s gonna cost me.” Obviously, there’s more details to that; usually, there are different parts of the architecture scheme, but once you get to CDs (construction documents), if you can advance with those and maybe get to 60%-70% [unintelligible [00:15:50].19] construction documents, then probably it makes sense for a GC to give you a GMT. So they’re gonna tell you what it’s gonna cost you today. That’s something huge that I’ve seen in my career, that is super-important.

Joe Fairless: You mentioned in emerging markets it’s harder to get permits and licenses, but those risks are upfront, and it’s less money that  you have currently in the deal, so that’s a good thing… In developed markets where is the largest risk for doing a development there?

Erez Cohen: As we look at the supply and demand in emerging markets – let’s take for example Mexico, but you could do the same argument for Brazil or India or Russia or China – the population is much younger. So because of that, you’ve got much more millennials, you’ve got gen Z’s etc. who are purchasing whatever it is you are selling to them, whether it’s an experience in a shopping center, whether it’s staying in a hotel, whether it’s an apartment, or renting some co-working space at a WeWork, or whatever it is. So because of that, usually demand is larger, and usually your productions are a little more interesting

On the one hand, we discussed how you could mitigate some of the potential construction risks, but then on the leasing/sales risk, or market risk, or however you look at it, in emerging markets it’s usually a little more comfortable. The demand is usually there. You have an investment thesis based on smarts and logic.

If you look at the developed world, obviously demand is lower in general terms, because the population is not growing, the demographic is not as interesting, the economies are growing at a much slower pace… So because of that, usually the construction and market risk are bigger risks, I would say, from my experiences developing in emerging markets.

So in emerging markets it’s probably gonna be permits and licensing. It’s dealing with the fact that there is law, but forcible law is very tough, and because of that you’ve gotta deal with local municipalities, with governments, there’s a lot of corruption, unfortunately… So because of that, permits and licenses are an issue.

But as you move, for example, to the U.S, obviously there is always the human element, and there might be challenges, with some sorts of corruption or favoritism, but in general terms the U.S. is a developed economy, there’s a forcible law, the courts are open for anybody… It’s much easier, and so permits and licensing is a little easier, but a the same time you’ve gotta deal with the challenge of the market risks, as we discussed. So overall, that’s my perception.

Joe Fairless: Tell us about a project that has lost money, that you’ve worked on.

Erez Cohen: There was one project when I was in investment banking — and fortunately, I haven’t had too many of those yet… But they will always come. If you do enough deals, you’re always gonna get one or two or three or four bad deals. Hopefully, you don’t get too many… But when we were in investment banking – I wasn’t an investor on this deal, but basically it was this resort time in Mexico. It’s near Cabo, it’s called La Paz, for any of your listeners who have actually been there. It’s a really beautiful place. The investors – they made a bet on this town taking off.

So what I’ve learned is that when you’re developing anything in resort towns – let’s say for example Myrtle Beach; something that your audience can relate with… In Myrtle Beach clearly there’s more access to their town. In this specific case there weren’t direct flights. Today you go to Cancun or to Cabo and you’ve got direct flights from any major city in the U.S. This town did not. The investors went in saying “Okay, we’re gonna go talk to United, we’re gonna go talk to American Airlines, we’re gonna talk to these different airlines and get them to change some of their routes and get some direct flights in there.” Unfortunately, that never happened…

And you’ve also gotta have support locally from the municipality, from the state etc. Here in Mexico it’s very tough, as we’ve previously said, to interact with the local communities, or the local municipality government etc. to get them to support  you. They really expect almost 100% of the support from the developers. And just as a parenthesis, I was recently at the Urban Land Institute Spring Meeting in Nashville, Tennessee, and that’s an example of a city that’s had phenomenal, phenomenal help from the local government and the state. I was in Nashville, and it’s like “Wow, what’s happened here…” It was absolutely inspirational to see what’s going on down there. But unfortunately, in Mexico it’s not the case, so in this specific investment the investors did not do well.

Joe Fairless: If presented a similar opportunity in the future, what are some questions you would ask about it prior to undertaking the opportunity?

Erez Cohen: First and foremost I wouldn’t be that focused on having such a great location, maybe a beachfront with a marina, getting the permits and licenses etc. I would be really focused on “Hey, guys, how are we gonna make sure that the demand  comes?” Because it’s a speculative development. For anybody listening who hasn’t developed yet, it’s really important that anytime you’re analyzing any type of deal, you look at the demand and you realize “Is it speculative demand, that it’s not currently there, but you’re gonna have to fly it in? Are you gonna have to bring it from some other city, some other state, some other country?” Usually, I don’t like those types of deals, because obviously there is much more risk involved in them. In this case specifically I would be super-focused on “Hey, how are you gonna bring in airlift in here? Who is gonna come and buy these beautiful condos on the beach? Who is gonna come and stay at this beautiful, luxurious hotel? Who’s gonna come and park their yachts here, when you’re an hour away from Cabo San Lucas, which has a much bigger marina?” etc. So I’d be very, very focused on the demand.

Joe Fairless: Based on your experience as a real estate investor, what’s your best real estate investing advice ever?

Erez Cohen: Wow. That’s a really great question. I would say – this might sound like a cliché, but I would say that any decision that you make, that it’ll be focused on maintaining a really good reputation. So many times in my career I’ve seen really phenomenal investors, people that are truly [unintelligible [00:21:49].03] that really understand supply and demand – which that’s what it’s really all about in terms of your investment thesis – who have really great relationships with equity investors, and with different banks etc, just really great people on the investing side, but they’ve made some very poor decisions regarding ethical standards; they decided to do things that were unethical, and they got caught, so they had to pay the price, and that’s very unfortunate.

So I’d say your reputation is everything, so every decision that you make, be focused on long-term. Think that you’re gonna be — whatever your age is, if you’re 20, 30, 40, 50, you’re gonna be working hopefully till you’re 80-90; you’d gonna wanna stay busy. So always make a decision based on that.

Joe Fairless: We’re gonna do a lightning round. Are  you ready for the best ever lightning round?

Erez Cohen: Let’s do it, Joe.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:22:48].16] to [00:23:23].16]

Joe Fairless: Okay, what’s the best ever book you’ve recently read?

Erez Cohen: Principles, by Ray Dalio.

Joe Fairless: What’s the best ever deal you’ve done?

Erez Cohen: A vertical residential deal in Mexico City.

Joe Fairless: And why was that the best ever?

Erez Cohen: Because we were able to mitigate almost all the risks. We went in when there were already permits and licensing in place, and a really phenomenal construction company was doing the building. We were able to pre-sell many of the units, and returns were over 40% IRR.

Joe Fairless: Best ever way you like to give back to the community?

Erez Cohen: I believe that it’s kind of like what Bill Gates says – it’s your fault if you die poor, but it’s not your fault if you’re born poor. I believe very much in that. I believe that helping children for me is the most satisfying thing, whether it’s children with cancer, or HIV, or any children that are impoverished… I take part in different foundations, and that gives me tremendous fulfillment… And all around the world.

Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?

Erez Cohen: I’m happy to connect with your listeners on LinkedIn. They can go and find me there. And if they really wanna learn a little bit more about me and the journey that I went through the last two years, they can check out the book that I’ve recently launched. It’s called Real Estate Titans, and they can find that on Amazon. I went and I interviewed 11 of the most phenomenal real estate investors from around the world, that I know have invested billions, or tens or hundreds of billions of dollars… And I went and I asked them many of the questions that you’re asking me… And they’re really just phenomenal. I learned so much from them. So there’s a little bit of my story in there as well. If you want to check that out, I’m sure that it’ll be tremendous value to  your readers.

Joe Fairless: Absolutely. The Real Estate Titans: Seven Key Lessons From the World’s Top Real Estate Investors. That is on Amazon.

Thank you so much for being on the show. I really enjoyed learning about what you’re doing with the developments in Mexico City, learning about the differences between developing there versus the United States, and then some global mindset lessons that we’ve talked about. So thanks for being on the show; I hope you have a Best Ever day, and we’ll talk to you again soon.

Erez Cohen: Thank you. It was a pleasure, Joe. I appreciate it. Take care.

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