How to Find Real Value and Invest Right Now

I have written two relatively recent articles on the economy. Lauren Baker summarized in advance of the ITR Economics keynote address at BPCON 22. They concluded that the signs point to a possible soft landing in the economy – an aversion to disaster. Good News!

Or not.

I discussed the possibility that the stranglehold of the commercial credit markets could crash-land this potential soft landing.

In my other article, I talked about the implications of the debt cycle. I looked at Howard Marks’s thoughts on the potentially devastating effect of restricted credit markets. We discussed the characteristics of a tight market as well as a liberal credit market. We reviewed the potential impact on the economy and what could go right or wrong.

This article will review how to invest in great deals in any market. Memorization. Howard Marks said that the best deals are made in the worst markets. He is not wrong.

I don’t know if we are going into a bad market or not. However, it is possible. And if it does, many of us will find the opportunities we’ve been looking for so long during this roaring last decade.

commercial real estate value proposition

Another famous investor, Nathan Rothschild, said, “The time to buy is when there is blood in the streets.”

I want to discuss the power of investing in intrinsic value. Warren Buffett is looking for it. So do other investors like John Templeton, Howard Marks and more. Many of these investors were profiled in a wonderful book by William Green: “Richer, Wiser, Happier: How the World’s Greatest Investors Win at the Market and at Life.” I highly recommend this book.

Michelangelo also looked for intrinsic value. Yes, I am talking about the sculptor Michelangelo. Instead of deep dive on that, I will refer you to my article Here,

Warren Buffett learned from his mentor, Benjamin Graham, that finding unknown or unrecognized intrinsic value is a strategy for building wealth reliably. It works in stock market, real estate and everywhere in life. Warren Buffett famously said, “Price is what you pay, value is what you get.”

Yes, I am talking about value investing in real estate. As many of you know, Jeff Bezos reportedly removed the lightbulbs from all of Amazon’s vending machines. Why did he do this? Because he couldn’t see the point in wasting electricity, manpower and a light bulb to advertise Lance snacks or any company sign on a vending machine.

Bezos knows the power of the dollar. One dollar saved or added to the bottom line each month translates to $12 per year. The current price-to-earnings ratio at Amazon has been hovering around 100 for several years.

This means that $12 in net annual income for Bezos and his collective Amazon investors translates into more than $1,200 in wealth. That’s pretty cool to think about $1 leverage on over $1,200!

Commercial real estate works the same way. Here’s a graphic to show you what I mean:

So how can one dollar of additional net operating income be converted into additional wealth in commercial real estate? Let me give you seven examples:

• Fill 15 vacant apartments at $825/unit? That translates to $12,375/month = $148,500/year divided by a 6% cap rate = $2.475M (potential increased value).
• Save $35/client per month on water bill * 125 units $4,735/month = $52,500/year = $875K potential incremental value.
• Mobile Home Lot Rent 5% = $15/month * 300 Increase Space? Translates to $4,500/month = $54K = $900K potential growth price.
• Spend $100K to add paid outdoor storage at $10K/month = $120K/year = $2M potential incremental value (over 100% annual ROI). ,
• Add U-Haul at $3,000/month?= $36K/year = $600K potential increased value.
• Add point-of-sale items to self-storage for $1,000/month? = $12K/year = $200K Potential ?Added value.
• $5/month * 800 storage units = $4,000/month = $48,000 = $800K Add insurance and late fees to the potentially inflated price.

Where do you find value in real estate?

You can find value in many different areas. A friend and expert investor of mine, Eric Eichhoff, is a real estate broker in Minnesota. He showed me how to buy a 4-bedroom house near the University of Minnesota campus for $400,000 and rent it out for just over $4,000 a month.

How? By furnishing the house and renting it out to seven different students. This is an example of intrinsic value creation. Eric saw an opportunity in the home that many other investors missed.

Airbnb offers a similar opportunity. Many people buy a single-family rental that rents for $1,200 per month and more than double that by furnishing it and renting it out on Airbnb or VRBO.

Another investor friend of mine, whitney hutton, told me a story about how he bought an $80,000 RV and rented it out on Outdoors. He made $40,000 in six months last summer. Even an RV can have intrinsic value!

We love finding the intrinsic value hidden in properties dominated by mom-and-pop operators. These can include self-storage, mobile home parks, RV parks, and more.

Self-storage, for example, has lots of value-added opportunities. These may include adding on the U-Haul fare. This may include adding a showroom and selling items such as scissors, boxes, tapes, etc. This could include graveling or paving over six vacant acres to add boat and RV storage.

Mobile home parks also have excellent buoyancy. The best value-add I’ve seen in mobile home parks is filling vacant lots with new or used mobile homes. Most mom-and-pop operators can’t afford it or don’t care. There is a lot of capital expenditure involved, as you can imagine. But it can provide massive upside to a professional operator versus getting a park from a mom-and-pop.

RV parks have similar opportunities, especially right now, given Covid-19’s acceleration of the already growing camping trend. there was a five fold increase New RV campers in 2020 versus the previous record year of 2010. This trend has continued to accelerate ever since, and has been further fueled by outdoors and RVShare sites that allow RV owners to turn their vehicles into rental units. Very powerful — and fun.

My favorite strategy starts by acquiring a diverse but similar group of mom-and-pop properties. Professionalize them by adding marketing, improving operations, and more can increase their net operating income.

Placing this previously diverse group of professional assets into one portfolio to sell to an institutional buyer is the crown jewel of this strategy. A professional buyer such as a REIT or insurance company will often pay a premium for a portfolio of such assets.

Another Tip for a Market in the Tank

cash.

I mocked Dave Ramsey in my first article in this series. But he’ll love this sub-point (I hope he reads it).

Having investable cash available to make deals is a powerful strategy when credit is hard to come by. These could be bank foreclosures, panic sales, or a number of opportunities.

We real estate investors love to invest using leverage. Since real estate is a hard asset, it is unlikely to lose all of its value. Less likely than crypto! (That was a stupid joke).

But there is a huge advantage to having cash available to scoop up all kinds of great assets in a down market. Howard Marks made billions for himself and his investors last fall.

Oaktree was buying nearly half a billion in distressed assets weekly in the autumn of 2008. A reporter said, “You’re not buying, you’re actually selling right now, right?” Marx replied: “No, we’re buying! If not now, when?”

Warren Buffett has been widely criticized for the amount of cash he has held in reserve over the years. It has had no less than $100 billion in cash for years. Does he know we “smart investors” missed something?

Perhaps the best strategy for finding properties laden with intrinsic value is cash reserves available. Potential one-two punch in any market and asset class.

Summary

How do you find good investments in any economy or credit cycle? It may not be a definitive formula, but I love the way Warren Buffett created value in his acquisition of Berkshire Hathaway. We real estate investors can also go and do the same.

Fun Fact: Did you know that Warren Buffett’s Berkshire Hathaway could lose nearly 99% of its value and still beat the S&P 500 over the last 60 years? it’s true and it’s explained in forbes article,

We can create and take advantage of great opportunities in any economy or cycle. In times when the credit market is crumbling, though, you may have to get a little creative.

What are your thoughts on this intrinsic value strategy? Are you setting aside any cash for potential deals?

Note by BigPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.