What do pro investors do when the market show signs of peaking?
They start looking for trouble … in a good way.
“With prices for stabilized properties rising … industrial owners invest in value-add and redevelopment.”
In this case, the trouble is …
“The lack of land for ground-up development in many … markets …”
That’s a supply constraint, which is a favorable problem for creating an equity-building supply and demand dynamic.
That’s because when you can’t build more, what’s already there is potentially more valuable … IF there’s strong demand.
In the case of industrial property, there is currently very strong demand …
“… the growing appetite for space” in the “red-hot industrial sector …”
So troubled tenants need more industrial space, but troubled developers can’t find big lots of land to build on.
The existing building inventory is apparently problematic in its current form … or those troubled tenants would be signing big long-term leases on them as is.
So that means more trouble. This time for current owners of outdated properties which aren’t meeting the needs of the changing marketplace.
Trouble, trouble, trouble, and more trouble … which all spells opportunity for someone.
Of course, renovating huge industrial properties is a BIG stretch for a Main Street Mom and Pop investor. These projects take many millions of dollars to get done. And that’s a problem too.
One way to play is to invest in publicly-traded real estate investment trusts (REITs). But as our veteran audience knows, we’re not fans of publicly-traded investments.
Publicly-traded investments are expensive to set up and operate … which dilutes profits to shareholders. Worse, public shares can be “bet” against in the Wall Street casinos.
On the other hand, a well-run private placement (a syndication), pools the investment power of many small investors into a large, professionally run fund … just like a REIT, but without the Wall Street shenanigans.
So for passive investors, private placements can be an attractive alternative to REITs. They’re just harder for Main Street to find … although it’s gotten easier and there are ways to find opportunities.
Of course, for active investors, syndicating is a great way to do bigger, more profitable deals. It can make sense to share most of the profits with your passive investors because your small piece of a big pie can be very satisfying.
But you don’t have to be an industrial property investor to play this game. In fact, you don’t even need to deal in dilapidated properties.
That’s because you’re not looking for property problems. You’re looking for people problems … or better stated …
You’re looking for people with problems you can solve … profitably.
Consider the plight of home builders …
New-home sales roar to a 16-month high on deeply-discounted inventory – MarketWatch, 4/23/19
It’s not necessary to get into the weeds on this one because national housing statistics are fairly meaningless. There’s no useful “average” in real estate investing.
If that puzzles you, think of it this way …
When you have one foot in near-boiling water and the other in near-freezing water, on average you’re comfortable.
But in the real world, you’re in severe pain.
Real markets are LOCAL. Problem ownerships are INDIVIDUAL. Every deal is different. Great deals and bad deals exist at the same time. Same for markets. They only average each other out in statistics.
That’s why there’s SO much opportunity in real estate investing.
Most other forms of investing involve buying the exact same thing everyone else has access to at the exact same price everyone else is paying at the particular time you invest.
Those non-real estate investors can’t negotiate on an individual basis. All they can do is attempt to time an entry or exit.
Sure, some of the more ambitious might study fundamentals hoping to find something in the financials others are missing.
But most simply divine charts and graphs looking for signs of a “breakout” against trend line “support” or “resistance” so they can front-run a price move up or down.
Real estate investors look for problems they can solve profitably by adding value … one relationship and property at a time.
And they know “value” is in the eye of the beholder … whether it’s the tenant, buyer, or seller.
When you focus your attention on creating value for the other party …
… you can charge more rent, reduce turnover, sell for a higher price, buy for a better price, or receive more concessions.
Learning how to identify exactly what with the other party wants is core to the How to Win Funds and Influence People sales training workshop.
While we could talk about adding value to tenants or buyers, for now let’s just focus on those new home builders who are dropping prices to move product.
Consider that some of those troubled home builders might be in markets with product types that would make attractive rentals … at the newly discounted price.
You and/or your investors might be able to solve a problem for the seller (the home builder) by buying not just one home, but several all at once … for a bulk discount.
If you’ve been around awhile, you may remember seeing this movie before … in the run-up to the 2008 financial crisis.
We’re not saying another crisis is around the corner. But who knows?
So it’s probably smart to focus on properties and financing structures which emphasize positive cash flow. This puts you in a better position to ride out a storm should one occur.
Remember … market peaks aren’t the time to speculate on further moves up … even if you get a great deal on the buy. Hot markets can fade fast …
Recently Hot Housing Markets Now See Biggest Sales Declines – Bloomberg, 4/22/19
Right now, interest rates are back down. That keeps your mortgage payments lower.
Certain home builder … especially small ones … may be motivated to discount in order to move product in bulk.
Lower interest rates and lower prices is a combo that helps your initial cash flow.
And if you find the right deal on brand new property … you’re less likely to have expensive repair surprises in the early years of ownership. This gives you time to build up reserves and raise rents as the local economy may permit.
But whether you simply want to write a check and let someone else do the dirty work … or you’re the hands-on type who plans to find the deal and oversee it …
When the market starts to heat up, it’s time to focus on building relationships with people whose problems you can solve profitably by adding value.
Until next time … good investing!
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