How I Found a Great Investment in a Tough Market (And in the Desert of All Places)

Is It Still Possible To Find Undervalued Commercial Real Estate Investments?

I believe it is, and I’ll prove it by telling you a remarkable story about a recent investment I made in a Nevada self-storage opportunity.

We are in a transitional market

We are in a time of transition. From a booming market to a volatile market. From historically low interest rates to the highest we’ve seen in years. From eager buyers, sometimes willing to overpay, to sidelined buyers, it’s just to see where the knife falls.

It’s been hard to find great cash-flow deals. And with higher interest and cap rates, even harder to pencil in. Times like these require more due diligence than usual and a dedicated acquisitions team turning every stone over.

I believe it is more strategic than ever to acquire underperforming assets from mom-and-pop operators. Such deals can offer resilience in a challenging interest rate environment and recession.

deal

So let’s take a look at this self-storage deal.

A question for residential real estate investors: What if you could get a home with $600 below-market rent on a street where similar homes currently rent for $1,480? That wouldn’t be very likely, would it?

My firm manages a diversified fund of recession-resistant commercial real estate assets. This includes self-storage, RV parks, mobile home parks, and more.

The big pocket has been published. My Book on Self-Storage Investing a few years back. The book outlines a strategy for acquiring struggling facilities from mom-and-pop owners, upgrading them, and eventually selling them to an institutional buyer.

This is the best example of this strategy I’ve seen.

This self-storage facility is in Henderson, Nevada, adjacent to Las Vegas. It was owned by the original builder from 1982 for over four decades. The facility came with over 40 years of handwritten records and no online marketing presence or management technology.

The manager personally collected rent in cash only when tenants paid in full. And when they didn’t pay, the manager rarely fired any of them.

The owner provided some free units to family and friends, including some homeless tenants who were in violation of the law. So it’s no surprise that the facility is in need of deferred maintenance, new curb appeal and enhanced security.

But what we found here is surprising.

The previous owner charged $60 monthly rent on the 10′ x 10′ unit. The current market rate for similar units in Henderson is $148. Here it means:

The facility’s rent can be increased by about 2.5 times and still remain competitive.

The new asset manager has also identified several other value-adds that will enhance income and asset value. These include selling retail items (such as locks, boxes, tape and bubble wrap) and adding more storage units on vacant land acquired with the property.

how do the rich invest

Many of America’s wealthiest investors love commercial real estate. While residential real estate values ​​are based on nearby comps, commercial real estate values ​​are directly proportional to income.

All other factors being equal, doubling a commercial real estate’s net operating income (NOI) doubles its appraised value. And this effect is magnified on leveraged assets.

So imagine how much this increased income from convenience can increase value and investor returns.

This may sound like the deal of a lifetime. But it definitely isn’t. Similar “diamond-in-the-rough” properties are hidden throughout the U.S. Unless, of course, you don’t have the time or interest to find these properties, and that’s where investing with a professional operator comes in.

This is how our firm invests (with professional operators), and we recommend that most people investing in commercial real estate follow a similar strategy.

The challenge for most investors is this: how do you successfully do due diligence on an operator? And on a deal?

My BiggerPockets Book can give you an overview of how to invest in self-storage. But if you plan to invest passively in self-storage, multifamily, or commercial real estate of any kind, I recommend another important book for your consideration.

my friend brian burke wrote hands-off investor, This comprehensive guide will give you all the information you need to carefully investigate both the jockeys (syndicators/sponsors) and the horses (the deals themselves).

If you are a new or experienced passive investor, I highly recommend that you invest in this book before investing a single dollar in any project.

final thoughts

We are all focused on security right now. But security should be a serious focus for every investor at all times.

Safety is a matter that should always be foremost in our decision making. And risky debt is usually the culprit. Most investors’ troubles these days stem from investing in risky debt assets.

The operator acquired the underperforming asset described above for cash. New managers are working hard to stabilize operations and cash flow. There are plans to add medium funding to this investment once optimized.

If executed as planned, this strategy should maintain safety, provide investors with an excess return on investment (ROI), and return some equity for redistribution into other investments.

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