Real estate value investors that use the forced appreciation approach like to take control of their investments, not waiting for outside occurrences to happen. The old saying, “If it's to be, it's up to me,” is a hands-on approach many investors use to create their own appreciation. These types of investors can create large returns through their expertise, hard work, market intelligence, shrewd observations, relationships and unique strategies.
Back in the early 90's, I bought a tired 20-unit apartment building in Phoenix from an inexperienced investor. I bought the property well below the market value in a short sale with the seller and his lender. I gave the property a nice swift kick in the butt with new management and some renovations, raised the rents over a four year period and sold a turn-key, fully occupied property to another investor for a nice profit. My investors and I made 10 times our investment in four short years.
Looking back now, it's easy to see the great profit potential. But, what's hard to see is all the hard work and hassles that accompanied this property. Was it worth it? Heck yes. Without my effort and hands-on work, the profit may never have happened. Most forced appreciation deals can be quite active and hands-on.
All Properties are Not Fixers
There are many ways to create value through forced appreciation that do not involve fixing properties. Generally, most people believe that to create value you need to get dirty by renovating properties. Not true. Savvy real estate investors that have good negotiating skills, combined with being at the right place at the right time, can buy properties or notes at significant discounts, especially in today's real estate environment.
For example, real estate value investor, The Magellan Group, purchased a $45M note for $32.2M, a 28.4% discount on a 100% leased, 531,000 sq. ft. industrial building. The as-is appraisal was $49,500,000, creating a significant value creation for The Magellan Group and a very safe loan for Mesa West Capital.
Properties are available to buy with value creation opportunities that are in great condition. With the distressed debt market, many top properties have been subjected to mortgage defaults. Shrewd investors either buy the notes at a discount or buy the property through a short sale.
Research Leads to Making Great Deals
All value creation opportunities are based on the foundation of research. Good ideas are supported by research. Medical breakthroughs are founded on good research. Technological advances are based on research. Research is the very essence to finding and proving value creation opportunities are viable. Without studying and researching, value investors are stuck with guesswork, speculation, and hunches that may lead to poor investments. It's like buying your home over the internet without ever seeing it – simply baseless.
It's amazing the number of investors that buy real estate without researching their investments. Peter Lynch, the superstar money manager, said, “Know what you're investing in and why.” To find the answer to WHY you are investing in a deal, you need to investigate and research your reasoning.
Value investors that invest in niche tenant bases need to research to find the best tenant base to target. Value investors that are planning to reposition a property need to research to find out who they're repositioning it to. Ivan Boesky said in the Wall Street Journal back in 1987, “My advice to investors is the same that I give to young investors in my classes. Devote the same earnest attention to investing that $50,000 as you devoted to earning it.”
Entrepreneurial and Enterprising Spirit
Forced appreciation opportunities require entrepreneurial foresight when buying real estate deals to plan and budget the value creation. First, an investor needs to see the value potential a property might contain. Many times, the real key to being a real estate value investor is seeing value or missed opportunities that others don't see.
Are there things you can add to a property that will increase rents? Does the property need better management? Is the property serving the highest and best use tenant profile to get the highest rents? Can you re-design space to generate more revenues? Are there services, features or amenities that you can add to generate higher revenues?
Once you've found ways to create value, next you must create a well thought out business plan that lays out your value creation vision. The essence of your plan should very pointedly spell out how you are going to create value and make money with the property. This plan will be used to execute your plan, as well as help you raise debt and equity funds.
Finally, you will need to sell your plan to potential stakeholders. If you have found a rock solid deal with lots of value creation opportunities, getting buy-in from potential partners will be easy. But in the end, the ability to see value in a deal and be able to communicate the value you see will be critical. Let your entrepreneurial and enterprising spirit shine.
I raised $10 million from one investment fund to partner with me to buy a three property portfolio of multifamily properties in the Phoenix area. The value creation opportunity was to reposition the assets toward the Hispanic theme tenant base. I presented a detailed business plan that clearly supported the underserved niche opportunity to my investor. When we met in Phoenix to see the properties, I was able to factually communicate the value creation opportunity. We eventually partnered to buy the properties. Be entrepreneurial with your thinking. Find better ways to do things that create value, and the support from stakeholders will be there for you.