Thesis driven real estate investment strategies
Investor · Member since 2020 · 12 posts · 3 votes
I know several different methods to investing in real estate, such as Fix and Flipping and the BRRRR method. Many of these are driven by COC returns and yield.
But does anyone have a thesis-driven approach? Such an approach may say, for example, that properties in the Chicago area are depressed in price and are bound to go up in value and would therefore be a good investment. Or that properties in rural areas within driving distance of a major airport may be less expensive currently but are likely to rise in value and therefore be a good investment?
Is there anyone with such a thesis that they can share?
@Levi Brackman, in my view, you are confusing financial returns of an investment as being the thesis.
Flipping and BRRRR both follow the same thesis: a property in disrepair within a proven market can be improved and increase the value. The measure of that thesis is CoC or yield.
Put another way: let's say your proposed thesis of "Chicago area properties are depressed and going to rise in value" is your guidepost. How are you measuring that thesis? Your thesis may be right but without a measure, and comparison metrics, you have no way of knowing whether you are correct.
And then, at the end of the day, real estate is an investment vehicle. Investments, by definition, are financially driven with every investors goal to maximize return given a specific risk tolerance. While risk is much harder to assess quantitatively, return can be very easily measured in several ways, hence the focus on CoC, yield, ROI, ROE, IRR, Equity multiple, etc.
I know several different methods to investing in real estate, such as Fix and Flipping and the BRRRR method. Many of these are driven by COC returns and yield.
But does anyone have a thesis-driven approach? Such an approach may say, for example, that properties in the Chicago area are depressed in price and are bound to go up in value and would therefore be a good investment. Or that properties in rural areas within driving distance of a major airport may be less expensive currently but are likely to rise in value and therefore be a good investment?
Is there anyone with such a thesis that they can share?
What I'll share is not a thesis. It's a calculated bet called the "path to progress". Usually, when a large company, industry or even the government decides to invest in an area it is usually followed by residential or commercial investors making bets and investing in areas where there was little to no investment before. This is why you see rural areas become suburban & depressed urban areas become gentrified. We look for those paths to progress.
Thanks Crystal Smith. I appreciate your feedback. Do you see any trends like this currently that you would be willing to share?
@Levi Brackman, in my view, you are confusing financial returns of an investment as being the thesis.
Flipping and BRRRR both follow the same thesis: a property in disrepair within a proven market can be improved and increase the value. The measure of that thesis is CoC or yield.
Put another way: let's say your proposed thesis of "Chicago area properties are depressed and going to rise in value" is your guidepost. How are you measuring that thesis? Your thesis may be right but without a measure, and comparison metrics, you have no way of knowing whether you are correct.
And then, at the end of the day, real estate is an investment vehicle. Investments, by definition, are financially driven with every investors goal to maximize return given a specific risk tolerance. While risk is much harder to assess quantitatively, return can be very easily measured in several ways, hence the focus on CoC, yield, ROI, ROE, IRR, Equity multiple, etc.
@Levi Brackman, in my view, you are confusing financial returns of an investment as being the thesis.
Flipping and BRRRR both follow the same thesis: a property in disrepair within a proven market can be improved and increase the value. The measure of that thesis is CoC or yield.
Put another way: let's say your proposed thesis of "Chicago area properties are depressed and going to rise in value" is your guidepost. How are you measuring that thesis? Your thesis may be right but without a measure, and comparison metrics, you have no way of knowing whether you are correct.
And then, at the end of the day, real estate is an investment vehicle. Investments, by definition, are financially driven with every investors goal to maximize return given a specific risk tolerance. While risk is much harder to assess quantitatively, return can be very easily measured in several ways, hence the focus on CoC, yield, ROI, ROE, IRR, Equity multiple, etc.
@Evan Polaski, given the thesis of "Chicago area properties are depressed and going to rise in value," I would then measure the appreciation rate against that of another major metro area that was not depressed, say Denver. If the value appreciated more that I'd say my thesis was correct. Of course, the higher rate of appreciation would result in greater ROI and IRR.
This is different from the BRRRR and Flipping approach, which is more akin to finding a property that is individually depressed in value, adds value to it, rent it out, or sells it at a profit. It is also thesis-driven but based on individual properties rather than based on market or demographic trends.
@Levi Brackman, I understand what you are saying, but in practice I don't see the applicability to it, particularly with a flip, since most of appreciation generated is going to be driven by the investor: their ability to find a deal at the best possible price and their ability to execute on the renovation within budget. To the renovation end, this compounds to having an existing network of contractors. And ultimately, the appreciation you are counting on within both of these models is primarily driven current market conditions in the near term, since this is driving most of your financial returns.
Where I do see an investment thesis taking hold is when you are looking at large scale, institutional assets. With these types of assets, your buyer pool on exit is much smaller, so you must think like your buyer thinks. In this regard, you will hear many people talking about major markets with diverse employment drivers, strong population growth, and strong rent growth outlooks.
@Levi Brackman, I understand what you are saying, but in practice I don't see the applicability to it, particularly with a flip, since most of appreciation generated is going to be driven by the investor: their ability to find a deal at the best possible price and their ability to execute on the renovation within budget. To the renovation end, this compounds to having an existing network of contractors. And ultimately, the appreciation you are counting on within both of these models is primarily driven current market conditions in the near term, since this is driving most of your financial returns.
Where I do see an investment thesis taking hold is when you are looking at large scale, institutional assets. With these types of assets, your buyer pool on exit is much smaller, so you must think like your buyer thinks. In this regard, you will hear many people talking about major markets with diverse employment drivers, strong population growth, and strong rent growth outlooks.
Right. We are now on the same page. The applicability would not be for fix and flippers. It would be for people who are buying the assets because they speculate that market conditions will change in their favor, and they will then make money when they sell it down the line. I am wondering if there are any investors here who invest with that in mind. True, these investors may be looking at larger asset buys; I am still interested in hearing from them and engaging with them and their ideas.
@Levi Brackman Market cycles generally dictate investment models with time horizons. Fix and flip, or arbitrage are good for peak markets with shorter exit strategies, because your trying to avoid the drop.. While buy and hold are preferred in down market, and can be combined with BRRR. You can get into more complex deals, such as MLOs to create other options to improve then purchase properties with the value built in from the cashflow. You could even go further and setup multiple MLO on multiple SFH, then refi using a portfolio loan using a NOI evaluation, thus shifting the value away from the building and over to the portfolio performance. Real Estate is just another commodity, and can be bought, sold, and traded a lot like stocks or crypto.. but it's unique element is the LTV, and tax havens that you can't find in these other assets currently.
@Levi Brackman Market cycles generally dictate investment models with time horizons. Fix and flip, or arbitrage are good for peak markets with shorter exit strategies, because your trying to avoid the drop.. While buy and hold are preferred in down market, and can be combined with BRRR. You can get into more complex deals, such as MLOs to create other options to improve then purchase properties with the value built in from the cashflow. You could even go further and setup multiple MLO on multiple SFH, then refi using a portfolio loan using a NOI evaluation, thus shifting the value away from the building and over to the portfolio performance. Real Estate is just another commodity, and can be bought, sold, and traded a lot like stocks or crypto.. but it's unique element is the LTV, and tax havens that you can't find in these other assets currently.
So glad to find another Levi (-;
Thanks for this response. This is much more of what I am trying to get at. People who buy a portfolio of homes in multiple regions or one region based on a thesis about market conditions (demographic, social, economic, etc.). I'd love to understand what the different theses are in this regard. I am asking because I am the founder of a company looking to help investors build fractionalized residential real estate portfolios based on a thesis-driven approach. I am trying to understand what the different theses are out there. Would you be willing to chat about this?
@Levi Brackman, with syndications in general, I look for operators that invest in the markets I outlined: diverse economy with strong employment drivers and growing employment, strong population growth, and historically strong rent growth. Given the trend of populations out of city centers and into the suburbs, I prefer the near suburbs to major markets.
As Levi T mentions, this thesis is appropriate in the large scale assets. When talking roughly 50 units and smaller, I take out the requirement for population growth.
No matter the scale, my thesis has always been "would I live here?" If I answer yes, then I am happy making the investment, since I consider myself pretty common and therefore imagine others like me will want to live there as well.
@Levi Brackman, with syndications in general, I look for operators that invest in the markets I outlined: diverse economy with strong employment drivers and growing employment, strong population growth, and historically strong rent growth. Given the trend of populations out of city centers and into the suburbs, I prefer the near suburbs to major markets.
As Levi T mentions, this thesis is appropriate in the large scale assets. When talking roughly 50 units and smaller, I take out the requirement for population growth.
No matter the scale, my thesis has always been "would I live here?" If I answer yes, then I am happy making the investment, since I consider myself pretty common and therefore imagine others like me will want to live there as well.
Thanks for this. This is super helpful. Why take out the need for population growth for less than 50 units?
@Levi Brackman, under 50 units, you are more likely to be selling to a local operator who knows and trusts the market they live in. Larger than 50 units (and this is not a hard threshold) you are more at a scale that out of state owners are your buyers and therefore need to have the demographic trending that professional owners are wanting to see.
@Levi Brackman, under 50 units, you are more likely to be selling to a local operator who knows and trusts the market they live in. Larger than 50 units (and this is not a hard threshold) you are more at a scale that out of state owners are your buyers and therefore need to have the demographic trending that professional owners are wanting to see.
Thanks for explaining this. I appreciate it a great deal!