Sam Zell got his start in real estate as a junior at the University of Michigan. A friend’s landlord bought an adjacent house and planned to tear down both properties to build a 15-unit apartment building. Zell pitched the owner on managing the new building. The owner said yes. Zell and his friend got a free apartment out of the deal, a management business, and the rest is history.

By the time Zell graduated from law school, he managed about 4,000 apartments and owned over 100 more. After graduation, he sold the management business to Bob Lurie and headed to Chicago to play in a bigger market. Three years later, Lurie partnered with Zell in Chicago. They would go on to build one of the largest real estate portfolios in the country.

In 1973, the real estate market was in the tank. Too much building led to oversupply. Inflation was sky-high. Zell saw an opportunity. He and Lurie switched gears to focus on distressed properties.

They bought $4 billion worth of real estate by convincing lenders the only way they could carry the property was by paying an interest rate below inflation. They created an arbitrage play. In total, they took on $4 billion in debt at an average fixed rate of 6% while inflation was 9% to buy apartments at half the cost to build them new. That ability to buy property below replacement cost was a staple throughout his career. When the market turned, the property values rose, and they made their first fortune. Continue Reading…