Bill Rapp here with the Heartfelt and Hot in Houston Blog, and this is our newest segment: Hidden Value of Distressed Properties!
Are you sick and tired of being outbid for investment real estate in this overheated market? Or even worse, are you overpaying for real estate just to deploy capital and get in the game? Hidden Value of Distressed Properties!
If you’re on the first path, you may be settling for dismal returns and missing out on real estate’s amazing tax benefits and appreciation. And you may be subjecting yourself to the whipsawing stock market or dismal yields in bonds. Or enjoying a lumpy mattress stuffed with cash.
If you’re on the second path, you might be on the tracks of an oncoming freight train. It may work out. I hope it does. But hope isn’t a sustainable business strategy for most of us, at least in my experience.
I’m writing today to propose a better path. A powerful path that could…
* give you access to deals others miss.
* protect you from downside risk.
* provide income and growth others only dream of.
* pave a path forward for your success in any market or economy.
Notice I didn’t say it was easy. Nothing good is easy. At least that’s what the old-timers say.
Also, notice I didn’t say it would work in every asset class. I believe the principles apply to every asset class, but certain types of real estate lend themselves to this type of thinking and action. Others, not so much.
Intrinsic vs. extrinsic value
Warren Buffett told us that price is what we pay, but value is what we get. Discerning the difference is the key to what I’m about to lay out.
The price of an asset reflects its extrinsic value. The intrinsic value is the often overlooked and typically unknown value locked within the asset. It takes a skilled eye to spot the latent potential in that asset and a skilled hand to extract that value.
Thousands of real estate assets are performing “fine.” They are operating exactly as designed, and their owners are quite satisfied with them. And these owners are elated that the rising tide of an overheated market can fetch them top dollar when they sell.
Now, if you are a savvy buyer with an eye for intrinsic value, you may be able to see the potential of the asset that is being completely overlooked by the seller who’s done things his way for decades.
You can’t change the cap rate, and you probably won’t talk this owner down to a lower price. And you can’t get this property from a bank that repossessed it.
In this overheated market, you will probably pay full price. But if you can see the hidden value and know how to extract it, you can make a fortune for yourself and your investors. Yes, even after paying full price.
An ancient Rabbi told the story of a valuable treasure hidden in a field. A man discovered this treasure and buried it again. Then he went and sold everything he had and bought that field. This is what I’m talking about in this post.
The extrinsic value changed dramatically. But the intrinsic value remained the same. It took our operating partner to see this value and extract it on behalf of investors.
I believe this strategy can work well for all types of real estate. But after being involved in many asset classes over 20+ years, I see a few issues that stand out.
First, I believe this works especially well for commercial real estate assets. Why? Because appreciation can be forced. The value is based on a math formula. The value can be raised by increasing the numerator and compressing the denominator (when possible). Often dramatically, as we’ve seen.
The commercial real estate value formula: Value = net operating income / cap rate.
Secondly, I recommend you choose an asset class with a fragmented ownership base. One that has a large percentage of unsophisticated owners and operators who don’t have the knowledge, resources, or desire to increase income and maximize revenue.
These owners have greatly profited from the rising tide that raised all boats in the past decade and never dreamed of the price they could now receive for their run-of-the-mill asset.
Third, I recommend you seek off-market deals. This certainly isn’t necessary for the strategy to work, as we see in case study #1 above, but it sure helps. And finding off-market deals is a game for the obsessively passionate, full-time real estate strategist, for the most part.
So, what if you’re not full-time in real estate? Can you still get these benefits? Certainly. I have never run a self-storage facility and never managed a mobile home park. As a professional passive investor, I make good money from passively investing in these assets through professional syndicators.
This may be the era of overheated real estate. But if you know how to find deals like this or know someone who does, it’s a fabulous time to invest. As it always is. Hidden Value of Distressed Properties!
The inspiration for today’s edition came from this original article: https://www.biggerpockets.com/blog/hidden-value-distressed-properties?utm_source=Iterable&utm_medium=email&utm_campaign=Newsletter%20%7C%2004/08/21%20%5BRegular%20%2B%20Plus%5D
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