The Beginning Investor’s Guide to Creating Lasting Value in Real Estate
Everyone wants a “deal.” Why wouldn’t you? The problem is that great “deals” are few and far between. Particularly in this age of information, with sites like Redfin and Zillow, any seller can look up their property and see about how much it’s worth. These sites also inflate values of properties, which gives sellers an unrealistic idea about the value of their homes.
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A fantastic thing about real estate, however, is that you can create value yourself. At a fundamental level, most pieces of real estate are, in and of themselves, created value because they were built where there was once just dirt. Someone saw that by adding wood, metal, and other materials, they could make that plot of dirt into a more valuable asset.
The idea that you as a real estate investor can create value to make a deal is an important mindset to have. You don’t want to go out there and buy poor deals that don’t have a value-add opportunity, but you also can’t be paralyzed into inaction because you can’t find a smoking “deal.”
The key is to develop experience and expertise in areas that will allow you to add value to properties. It takes time to develop strategies, skills, and networks, but it is ultimately how you will become a successful investor. These are the top four ways to set yourself up to create value.
The Top 4 Ways to Add Value in Real Estate
4. Be the Expert in a Small Area
I was told something this by a wicked rich dude at a networking conference, and I have never forgotten it. His advice was to be the utmost expert in a small area. A small area could be in reference to a geographical location, an industry, or even a part of the real estate process.
Your expertise can also change. I started out having zero expertise, then I worked for a company that bought foreclosures as flips, and I became the renovation expert; then I found investors and became the single-family rental home expert, and now I’m trying to be the expert in small apartment buildings in Utah. There is always going to be someone who is “more expert” than you are, but the point is that you get to know something very well because then people will come to you and ask your advice.
I can’t swing a hammer without tearing an ACL, but I knew that renovations were an integral part of flipping homes. Through trial and error (mostly error to start), I slowly figured out how to renovate homes efficiently. I found out that even a little bit of expertise puts you ahead of at least 95% of people in the world.
Family friends started coming to me with renovation questions, and I started to farm out my contractors and subs to do work on multi-million dollar homes that my friends owned. The homes that my workers usually renovated were less than $200,000 in value, but I figured out that contractors in high end areas ripped people off on basic things like paint.
The real benefit of expertise is that you quickly become a high demand talent. In 2011, when I met with the people who would eventually hire me to run acquisitions in California for Silver Bay Realty Trust, there simply weren’t that many people who were experts in renovation and single-family home rentals. Hell, I may have been the only one — and I wasn’t really an expert at either. However, since I had picked such a specific area of expertise, I suddenly had a lot more value and was compensated more than an inexperienced twenty four year old should have been.
3. Actively (and Unselfishly) Build Your Network
A wise man once told me that “your network is your net worth.” The thing about building a network is that you have to do so unselfishly. Everyone has been to the alumni cocktail party with the guy who shakes your hand and immediately gives you his business card. This guy has read every book on networking and is very eager to see what you can do for him.
Wrong approach, pal!
You want to see what you can do for other people. The reason is that you are more genuine, and also, you are able to show your value quite clearly. No one should be below you helping them, either. I’m a big believer in good will, and the more you help people, the more people will help you.
Having a great network allows you to create value by giving you resources to do deals that other people won’t be able to. The timid young real estate agent who wanted to get coffee could give you a heads up about a super sweet listing that he has, and maybe he talks the seller into letting you lock it up with a preemptive offer. Connecting a down-on-his-luck contractor with a friend to give him some work could be the key to allowing you to do the beat up deal that the timid young agent brings you.
But even if a good deed never comes back to pay dividends, it is still time well spent because you helped someone else. Studies have shown that helping someone else is rewarding and makes people happy. If you are happy, then you are going to think more clearly. If you think more clearly, then you are going to be able to find deals where you can create value.
Anyone ever read If You Give a Mouse a Cookie?
2. Be Persistent
Creating value is hard. You simply must be unflappably persistent. Never give up. Never stop grinding. These are all somewhat cliché, but it helps to hear these things over and over. I have found that just when I’m about to give up on an idea, I have had many of my breakthrough moments. Part of it is that I’m just not smart enough to succeed before I fail a lot, but the other part is that most people give up pretty easily.
I used to drive around ghetto neighborhoods in my free time after work and on the weekends looking for deals. It was a really stupid way of trying to find a house — I simply didn’t know there were such things as Redfin or realtors who would show you listings on the market. I was just starting out and was anxious to get going. After the second weekend of driving around for six hours, I was pretty convinced I was on a fool’s errand.
How stupid can I be to think that I will just find some great deal by randomly driving around?
Alas, I had no social life, so I told myself I was going to do this process for ten weekends. On the last day of the tenth weekend, I found the house that would ultimately be my first purchase. It was a beaten down ramshackle piece of crap, but I had driven the neighborhood so much that I realized there was value because all of the other homes on the market had been snapped up quickly. It may sound like a miracle or fluky situation, but I chalk it up to persistence.
If you try hard enough, for long enough, you will inevitably be successful at creating value for yourself.
1. Go for Deals Other People Don’t Like
I’m an admitted contrarian. Some people would just say that I’m a jerk, but that is beside the point. There is inherent value in thinking differently than other people. If you are a BiggerPockets member, then you are likely one of these people. Most people aren’t mindful enough to want to invest in real estate to build long term growth – they’d much rather just have their iPod, flat screen TV, expensive leased car, and annual trip to Hawaii.
I think you need to take your “think differently” approach one step further to find and create value in real estate properties. I live in the San Francisco Bay Area, and everyone and their brothers love, and I mean love, the idea of owning real estate in San Francisco. Prices have gone up by millions of dollars since the recession.
I started to look into it and thought about things a bit differently. San Francisco is one of the most tenant friendly cities in the US, there is rent control, the buildings are old and require maintenance, there are crazy earthquakes that make EQ insurance prohibitively expensive, and the cap rates are less than the debt service. “But prices have gone up soooooo much,” I’m told constantly.
I decided to invest in single-family homes about an hour away from San Francisco that produced double digit cap rates, had no rent control, that I purchased for half of replacement cost, where EQ insurance was shockingly cheap, and where there wasn’t a ton of competition (at least initially), so I could get scale.
When I tell people how much my properties went up in value, they laugh at me with scorn and say, “A couple hundred thousand is great, but imagine if you had bought something in San Francisco!” The problem with that thinking is they aren’t looking at the numbers. San Francisco prices went up about 50%, which is amazing. However, my properties doubled in value, and I was able to buy a greater dollar amount because there was less competition because no one liked the less swanky homes in the ghetto.
This is only one example, and I’m not advocating for you to go buy crummy properties. I’m suggesting that you look hard at the areas that people quickly dismiss because often times those are the ones where you can create the best value.
How have you created value in your real estate niche? What would you add to my list?
Leave me a message in the comments section below!