Business & Investment

6 Ways to Find the Essential Value of Real Estate

Michelangelo is one of the greatest sculptors in history. I never dreamed that he would teach me so much about real estate investment. But he did.

Michelangelo said: “Before I start working, the sculpture is already completed in a block of marble. It’s already there. I have to scrape off the excess material.”

When I first read this quote, I thought it was ridiculous. Was this a strange riddle?

But this is a powerful truth, dealing with a variety of topics such as art, love, and real estate investment.

Take a block of stones. The machine operator carved it from the quarry, along with hundreds of other things that looked the same. Probably a product with a price tag of several hundred dollars.

Then hand this marble block into the artist’s hands. An artist who can imagine what this rock is. If you give them the right tools and time, the results can be magical.

The artist can imagine the intrinsic value of the stone. And by bringing it to life, sculptors can create valuable works of art that are exponentially more valuable than rocks.It is “preciousRealm.

So Paul, what does this have to do with real estate again?


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Current status of real estate investment

This is a historically difficult time to acquire real estate. Demand is higher than ever, interest rates are approaching historic lows and inflation is imminent. The BiggerPockets community has taught and encouraged hundreds of thousands of investors to participate in the game. But it’s not easy.

Some investors are told to buy above wise levels as prices are constantly rising. Well, it may keep going up. But ask the millions of people who were burned in the 2008 financial crisis how well it worked. And ask Warren Buffett and other top investors who say this is stupid.

Other investors are looking for value-added deals. I applaud them from the bottom of my heart. However, most of the assets that most investors want to acquire already have most value added. why? This is the result of the popularity of apartment investment and this long and overheated market.

BiggerPockets investor Kris Bennett investigated this situation in the area of ​​apartment buildings. He concluded that about 93% of apartments with more than 50 units are owned by companies that own multiple apartment assets.

Not all of these are working well. Not everyone derives value from them. But in my experience, most of the value is added. It is difficult to find value-added opportunities in apartments, and those coveted deals usually go to insiders.

Houses are on similar boats. It’s hard to find a good deal to fix and flip or rent.

So what if you can’t make a profit from added value?

Introduction of the concept of “essential value extraction”

Let’s define for our discussion External value As the selling price of the asset. The price at which the asset can be acquired. For our sculptors, this is the price of a marble block.

And let’s define Intrinsic value As the true potential value of an asset. This is primarily the hidden future value of assets that trained professionals can achieve. This expert has both the ability to find assets with essential potential and the skills to extract them.

I encourage you to become that expert. Or link to one.

I chose the latter. And I have achieved the best consistent profits in the real estate industry for over 20 years.

6 examples of extracting intrinsic value

We won’t go into detail about how intrinsic value extraction works, as the details vary significantly by asset class. Instead, I’ll give you some simple examples to raise your level of excitement.

Self storage upgrade

My company invested in a self-storage facility acquired in March 2019 from the Texas Brothers feud group for $ 2.4 million in cash (external value). After upgrading marketing and operations, the facility was valued at $ 4.6 million. The operator acquired $ 2 million in debt and left only $ 400,000 in shares in the transaction. When real estate was sold for $ 4.6 million (intrinsic value) in late 2020, shareholders left with $ 2.6 million in cash.

Find wise land use

My son bought an 85 acre mountain parcel for $ 215,000 (external value). Within a month he sold the timber for $ 200,000. Within a few years, he will have the opportunity to cut it into about 10 lots, each worth an average of $ 30,000. In the meantime, he can rent hunting rights for at least $ 1,000 a year to cover taxes and could hold a long-term cell tower lease worth $ 800 a month. After adding some value through research and soil testing, his intrinsic value is over $ 600,000. (Can you say that you are proud of your son?)

Reversal of mobile home park

My company invested in a Midwestern mobile home park acquired in early 2020 for $ 7.1 million ($ 3.5 million in stock and about $ 3.6 million in debt). The owner hasn’t visited the park for more than five years and has been declining. Our operating partners have reduced bloated costs and improved the community. He returned the utility bill to the tenant and raised the very low rent moderately. Within a year, the park was sold to a great operator who looked upside down by filling about 50 vacant lots. The sale price was over $ 14 million and the IRR was 347%.

Rise in total rent

Eric Eickhof, a friend of my real estate broker, is helping Minneapolis investors get a seemingly overpriced home near a college campus for about $ 400,000. Most investors turn to these homes, which they rent for around $ 1,500 a month. However, Eric teaches them to rent for $ 700 per bed and often gives them a total rent well in excess of $ 4,000 per month.

Add to your advertising budget

My friend Jerry paid $ 5 million ($ 1.7 million shares) to acquire a 125,000-square-foot warehouse with a net operating profit of $ 200,000. He saw the opportunity to add value by implementing some basic business strategies. He spent $ 45,000 on advertising to fill vacant seats and raise rent. He even charges a $ 500 rent for a parking food truck, which is directly linked to revenue. His current value is $ 7 million and his capital has more than doubled.

Divide and rule

Innovative self-storage developer AJ Osborne has acquired Reno’s SuperKmart for $ 6 million. He sold the parking lot to an apartment developer for $ 2 million, leaving $ 2.5 million in capital and contract debt. He cut the building in half and created a beautiful self-storage facility. He declined the $ 26 million offer from institutional investors because only 40% of the facility was leased.

There are other examples. One of my friends is trying to buy a low-priced office space in Washington, DC to offer a condo to individual buyers. One is to develop a strategy for transforming the mall into a life for the elderly. Another bought a house and turned it into a commercial space. I bought a 5 acre non-subdividable waterfront tract and got the difference to create a small subdivision.

Asset class with the highest potential intrinsic value

We talked about the challenges of finding apartments and single-family homes with high potential for intrinsic value. So which asset type has the greatest potential?

Some may believe that the worst-suffering asset type has the highest potential. Today, malls, retail stores and hotels are certainly cheap. However, even a foreclosure sale does not always fit this model just by buying the asset at the lowest price. It is possible, as in the example of Kmart’s conversion to self-storage. But not always.

The best place to find such deals is the assets owned by Mom and Pop. Property types with significantly fragmented ownership bases and owners who do not have the knowledge, desire, or resources to increase and maximize their income. value.

These owners have often owned assets for a long time. And they benefit greatly from compressed cap rates that boost the value of almost every real estate asset.

My two favorites are self-storage and mobile home park. For my reasoning about these asset types, Various previous articles.. This is a comparison of apartment ownership compared to self-storage and mobile home parks. Thanks to Kris Bennett, a member of BiggerPockets who first devised this comparison for Ten Federal Storage.

Does it sound like I’m biased towards these asset classes? I probably do. I’ve been in the real estate investment world for 30 years and so far these are the best asset types I’ve seen. But this may change tomorrow.

One thing that hasn’t changed is my passion for investing in assets whose intrinsic value far exceeds their price. We hope you understand the value of this powerful strategy.

Oh, and thank you, Michelangelo.

6 Ways to Find the Essential Value of Real Estate

https://www.biggerpockets.com/blog/intrinsic-value 6 Ways to Find the Essential Value of Real Estate

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