Everyone wants to add value to their investments.
Value-add real estate investing does just that … often accelerating equity growth by increasing income.
Each time you work to make a property more appealing to a tenant or a buyer, you make the property a more valuable investment … and you don’t have to wait for inflation to do it for you.
Another bonus of a value-add investing strategy … it reduces some of the price risk of acquiring properties near the top of a market cycle.
The growing movement to cap how fast investors can raise rents on certain properties means it makes sense to take a look at niches that are less likely to become targets in the rent control fight.
That’s why we are chatting with a veteran value-add investor. Discover how … and where … he is finding opportunities in this market cycle.
In this episode of The Real Estate Guys™ show, hear from:
- Your valuable host, Robert Helms
- His bang-for-your-buck co-host, Russell Gray
- Author, podcaster, and investor at Wellings Capital, Paul Moore
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Finding a formula for adding value
The more value we create … the more cash flow we can have. And the more our property is worth over time.
Today we’re talking about value creation and specific niches within real estate that can be exceptionally profitable in the current market.
In real estate, one of the greatest things is that we get to create value. The reason that people will pay rent to live in your unit is because it’s of value to them.
In our real estate vernacular, we talk about forcing equity … creating value in a property by doing something to change it or make it better.
One of the greatest things about real estate compared to other assets is that many of the things that will increase its value are in YOUR control.
The key is finding the right formula, if you will … the secret to adding value in the right way for the right returns.
When a real estate entrepreneur figures out how to go into any asset class or niche and create value by formula … or by routine … they can learn to repeat that process fairly efficiently.
More often than not, they can produce a predictable result.
Two niches ripe for value-add
Today we’ve got a guest who has got a wide variety of background in real estate.
Paul Moore has done a lot in the past 20 years … and he is here to share a glimpse at his formulas for creating the most value.
After selling his company at age 33, Paul wasn’t sure what to do next.
That’s how he found real estate. Admittedly, Paul says his first experiences were more speculation than true investment … but he learned there was a better way to create value.
“There is a value formula in commercial real estate. It’s income divided by the rate of return … specifically, the net operating income divided by the cap rate … and that means we can force appreciation,” Paul says.
Lower interest rates have also been part of that formula … but now there is international money coming in at a record pace.
So many factors are driving down the cap rate … and it’s making it really, really hard to get a good deal in this day and age.
“But there’s never a bad time to invest in real estate if you’re smart about it … if you pick your markets, if you pick your product types carefully,” Paul says.
After chasing multifamily deals for a number of years, Paul and his partners at Wellings Capital began to look at self-storage and mobile home parks.
There was a factor for those two asset classes that was very different.
Only 7% of multifamily properties over 50 units are owned by individual investors or operators. About 93% are owned by companies that have wrung the value out of the property.
But about 76% of self-storage and about 90% of mobile home parks are still owned by mom and pop shops or individual investors … there is a lot of meat left on the bone.
It’s a unique opportunity that won’t last forever.
When you have fractured ownership and operators who are inefficient, you can come in and figure out how to increase efficiency and therefore add value.
And a lot of those individual owners in these two niches are in their 60s, 70s, and 80s.
Some of them live at the beach … some live on site … but most don’t like to rock the boat with their tenants.
Many haven’t raised the rent in years. Some of them don’t know or care to fill vacant lots. They just want an easy life.
So … there is a big opportunity for a professional operator to acquire these assets, upgrade them to institutional standards, and then sell them off for profit.
The magic of mobile home parks
Mobile home parks are an asset class we’ve had our eye on for a long time. But not all mobile home parks are created equal.
In some cases, the park owner only owns the land and rents out the spaces. Sometimes the owner actually owns some or all of the homes.
Most of the professional operators that Paul and his partners run into really just want to own the dirt and the infrastructure and lease out the lots to individual owners.
Unlike apartments, mobile home park tenants tend to be “stickier.”
If someone is renting an apartment, and the rent is raised by 6%, they’re likely to look for another apartment.
But if someone owns their own home and is renting the lot … let’s say for $400 a month … a 6% increase is only $24 more dollars a month.
It costs several thousand dollars to move a mobile home to a new location … so paying $24 more a month is still the better deal.
“It’s really important to us that we don’t take advantage of that fact. We don’t want to gouge people. We simply want to go in and bring a park up to institutional standards,” Paul says.
The goal is to make the park a beautiful place to live, make it a community, and then potentially be in a position to sell it to an institution.
Another great aspect of mobile home parks is that they have a longer duration of tenancy than virtually any other asset class.
Most mobile homes that get abandoned are due to someone passing away and the family not wanting to move the home elsewhere.
Even this situation is an opportunity. An owner could rehab the home for a few thousand dollars … and then sell it to a new tenant.
Learn more about value-add opportunities in these niches … and how to get started with help from Paul and his partners … by listening in to our full episode!
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