Are you tired of overpricing investment real estate in this overheated market? To make matters worse, are you spending too much money on real estate just to develop your capital and participate in the game?
If you’re on the first path, you may have settled on disastrous returns and missed the amazing tax incentives and appreciation of real estate. And you may be exposing yourself to the disastrous yields of whiplash stock markets and bonds. Or enjoy a rugged mattress filled with cash.
If you are using the second pass, you may be on the track of an oncoming freight train. That may work. I hope so. But, at least in my experience, hope is not a sustainable business strategy for most of us.
I am writing today to suggest a better way. A powerful road with potential …
- Provides access to transactions that others have missed.
- Protects you from downside risks.
- It provides the income and growth that others dream of.
- Pave the way for success in every market and economy.
Note that I didn’t say it was easy. Good things are not easy. At least that’s what old people say.
I also didn’t say it would work for all asset classes. I think the principle applies to all asset classes, but certain types of real estate can help with this type of thinking and behavior. Other than that, not so many.
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Intrinsic and extrinsic value
Warren Buffett told us that the price is what we pay, but the value is what we get. Identifying the differences is the key to the content you are laying out.
The price of an asset reflects its external value. Intrinsic value is an often overlooked, usually unknown value that is trapped within an asset. It takes a skilled eye to discover the potential of the asset, and a skilled hand to unlock its value.
Thousands of real estate assets are functioning “good”. They are working as designed and the owners are very happy. And these owners are delighted that the uptrend in overheated markets can bring them the best dollars when they sell.
Now, if you’re a savvy buyer looking at intrinsic value, you have the potential for an asset that’s been completely overlooked by a seller who has done things his way for decades. You may be able to see it.
This is your chance!
You cannot change the cap rate. You probably won’t talk to this owner at a low price. And you can’t get this property from the bank that got it back.
In this overheated market, you will probably pay the full amount. But if you look at the hidden value and know how to extract it, you can make a lot of money for yourself and your investors. Yes, even after paying the full amount.
The ancient rabbi talked about the precious treasure hidden in the fields. The man found this treasure and buried it again. Then he went and sold everything he had and bought the field. This is what I’m talking about in this post.
Let’s look at some examples.
Case Study # 1: Home Rental Property
My friend Eric Eikhoff is an extraordinary real estate broker and investor in Minneapolis. He helps investors find a home in bed that they can get and rent to college students. You can get a $ 400,000 home near the campus for the full price. You and I may think it’s too expensive, and the seller may be smiling all the way to the bank. Other investors passed because they could only borrow for $ 1,500 per month.
But Eric knows more than the value of a home in his neighborhood. He knows the rules of zoning, walking times to important parts of the campus, and student rental preferences. And he knows a great property manager to rent by the bed. He helps investors buy homes, and then he prepares them for a much higher income stream. He says seven beds for $ 600 a month — it’s $ 4,200.
As I said, Eric understands the intrinsic value of residential real estate in Minneapolis.
Case Study # 2: Texas Self-Storage Facility
My company is investing in a Self-Storage Facility with some of the Intrinsic Value Extraction experts. One of our operating partners, Matt, has connected with five angry brothers in Texas. Their parents died, leaving behind an unequipped self-storage facility for them to manage.
They weren’t doing well, and they were ready to sell their 600 units of assets as soon as possible. Matt was on the plane within a few days. Matt was able to understand the potential of the asset and he made a $ 2.4 million cash offer. They closed immediately.
Matt’s team went to work. They built a website and implemented a marketing program. They kicked out deadbeat tenants and raised rates to market levels. They hired great managers to reduce bloated expenses. Vacancy has been cut in half from 20% to 10%. And they rented U-Haul trucks.
Three months later, in June 2019, the property was valued at $ 4.6 million. Since then, Matt has acquired a debt of $ 2 million, which is a 43% LTV ratio. Matt sold the property for $ 4.6 million in September 2019, with about $ 400,000 equity investors taking $ 2.6 million home. It’s not a bad payday.
Case Study # 3: Midwestern Mobile Home Park
The owner died in 2015. His wife lives in three states and she has never visited more than 300 plots of parks. The manager was very talented, but did not have the skills, resources, or desire to increase the park’s income and maximize its value.
This was a typical mama and pop operation. The world of manufactured homes is full of them, accounting for 85% to 90% of the 44,000 mobile home parks nationwide.
Our operating partner acquired the park in early 2020 for approximately $ 7 million. Operators have reduced costs by more than $ 60,000 and improved the tenant community.
The owner of the previous park paid a utility bill, which was very unusual for a park of this size. The operator returned the utility to the tenant, saving over $ 100,000 a year.
The park also has about 50 vacant lots, and our partners have begun plans to fill these vacant lots. This is a large business and will be tried by a few moms and pop operators. When the team started on this path, they received an undeniable offer.
The operator sold the property for over $ 14 million. The value of the asset has doubled, but equity investors have gained 3.4 times and 240% in about 10 months.
Has the value really changed? Yes and no.
External values have changed dramatically. However, the intrinsic value remained the same. It took time for investment partners to identify this value and derive it on behalf of investors.
Who is the winner of this strategy?
Who won this deal? The same party who wins in most of these types of transactions.
- Original seller.. The compressed cap rate turned mediocre assets into a $ 7 million severance pay scheme for this woman.
- Last purchaser.. By filling 50 vacant lots, he still got a fairly upward park.
- tenant.. They got a much better park with professional management, and their rate was well below the market level.
- environment.. Studies show that if tenants pay their own utility bills, water usage will be reduced by more than 30%.
- Bank.. Banks may not care, but it’s good that banks are made up of investors and are making significant profits.
- Syndicate.. He earned over a million dollars.
- Passive investor.. They made millions of dollars in less than a year. And they didn’t visit the park or let go of their fingers.
What is the best property type for this strategy?
I think this strategy works well for all types of real estate. However, after working in many asset classes for over 20 years, there are some notable issues.
First of all, I think this is especially suitable for commercial real estate assets. why? Because you can force gratitude. The value is based on a formula. You can increase the value by increasing the numerator and compressing the denominator (if possible). Often dramatically, as we have seen.
Value formula for commercial real estate: Value = Net operating profit / Cap rate.
Next, it’s a good idea to choose an asset class with a fragmented ownership base. A high percentage of unsophisticated owners and operators who do not want to increase their knowledge, resources, or income to maximize their income.
These owners have benefited greatly from the ebb and flow of the tide that pulled up all the boats in the last decade and never dreamed of a price they could receive for today’s ordinary assets. did. This applies to both case studies # 2 and # 3 commercial assets above.
Third, it’s a good idea to look for off-market transactions. As we saw in Case Study # 1 above, this is certainly not necessary for the strategy to work, but it does help. And finding off-market deals is almost always a game for enthusiastic, full-time real estate strategists.
So what if you’re not full-time in real estate? Can you still get these benefits? That’s right. I have never run a Self-Storage Facility or managed a mobile home park. As a professional passive investor, I make a fair amount of money by passively investing in these assets through professional syndicates.
This may be an era of overheated real estate. But if you know how to find such a deal, or someone who does, it’s a great time to invest. As usual.
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