In the image to the right you see a toy rocket launcher. My kids were gifted this toy for their 4th birthday some time ago by a family friend. The action is pneumatic – you slide a rocket onto the launcher, step onto the air compressor thingy, and off it goes – pretty cool actually…they love it!
I was playing with the kids one day and my daughter decided that we should aim at the play set about 20 feet away in the yard. So – we did; we aimed the rocket at the play set the best that we could and launched.
We were off by a mile…my daughter Isabella looked at me puzzled. I smiled and said:
”Bella, I guess even though we thought we were aiming just right, we were off. Let’s try to aim the rocket again and see what happens” – we carefully moved the nose of the rocket a bit to the right and shot…
Missed by a mile again, but to the other side this time, at which point I found myself doing my best to explain to my four year-old daughter the One in Sixty Rule.
The One in Sixty Rule
One in Sixty Rule states that a trajectory which is deviated by 1 degree off course will place an object off of the intended destination by 1 mile for every 60 miles (57.3 to be exact) of travel. This rule illustrates the immense impact that a very minimal change can have on the outcome in conjunction with other variables.
For example, while changing trajectory by 1 degree when traveling by foot for one hour we will note a very minimum impact on the destination point, but the same change in a jet airplane will take us to a point 1 mile away from the intended. In some cases this would mean that instead of landing on a strip at an airport you would land into the ocean or the mountains – neither of which will be particularly a pleasant experience.
How would you like to be in a 747 landing 1 mile off – all it takes is 1 degree?
What is the Implications to Us
Considering that the game of real estate is indeed a fast-moving enterprise in a lot of ways, the lesson seems to us investors seems rather straight forward:
Small Changes Can Make Big Differences in the Right Circumstances!
So – if small changes can have such dramatic impact on the transaction, then the job of a real estate entrepreneur is to find those small differences and circumstances, and to find the “1 degree” which in conjunction with time, or another relevant variable, will take us to a very different destination.
Something to keep in mind is that the larger the project the greater the impact of a miniscule change. Currently I am pursuing the syndication model of acquisition of large apartment communities (50 – 150 units), and let me tell you – WOW.
In a 10-plex situation, improving the NOI (Net Operating Income) by $25 per unit per month constitute an increase in valuation of $3,000.
Value = NOI / CAP Rate = ($25 x 10 units x 12 months) / 10% = $30,000
Nice – just increasing rent by a measly $25/unit we can create a value of $30,000! However, consider this in terms of a 150-unit apartment community:
Value = NOI / CAP Rate = ($25 x 150 units x 12 months) / 10% = $450,000 !!!
WOW!!! $450,000 – how’s that for a payday? And here’s the thing – how much work do you think will be required to increase the rents by $25/month? Would some mulch and flowers get it done..? What if I do a few other things which enable a rent increase in a $100/month range…
This is why having created hundreds of thousands dollars of value in small multiplex, I am choosing to throw my hat into the large apartment space via a syndicate – time to create millions…
Small changes can have a great impact indeed. The trick is to “see” the 1 degree. I quote Helen Keller:
“The only thing worse than being blind, is having sight but no vision”
In fact, this is the most difficult and abstract aspect of Real Estate Investing is seeing that which others can not. However, if you develop an ability to have a strategic vision, you will create a very formidable advantage for yourself over your competition.