In real estate investing, analysis is the be-all and end-all for many investors and soon-to-be investors. In meet ups, on forums, and in the real world, investors as a whole have this obsession with the best spreadsheet, tool, or person to “analyze” a property for investment.
Yes, analysis is vital to having success in a investment, especially in real estate. What bothers me is the focus it receives and the type of analysis being done. The type of analysis I so frequently see is simply plugging in given numbers into some super complex spreadsheet that in reality is only doing basic math.
What so many fail to see is that anyone can do this type of analysis. There are literally hundreds of spreadsheets online that allow the same analysis of an investment property. Often the spreadsheet gets downloaded, the income and expenses for a property get plugged into the spreadsheet, and out pops a number for cash flow, value, COC, ROI, IRR, or whatever else you could ask for.
Analysis as a Commodity
This type of analysis is a commodity. Literally anyone can do it if they own a computer. Merriam-Webster’s dictionary defines a commodity as: a good or service whose wide availability typically leads to smaller profit margins and diminishes the importance of factors (as brand name) other than price. Just as with other commodities, analysis is vital to the process in which they are involved. But as the definition states, when it is widely available, it diminishes the importance of factors.
I believe creativity is greater than analysis. Whether you’re buying single family houses or large apartment complexes, if you simply take the actuals and plug them into a spreadsheet and say, “That’s what the property’s worth, and I want to buy it for [70%, 80%, 90%] of that figure,” then you will forever get outbid by someone who can see opportunity that doesn’t show up on that spreadsheet anyone can create.
As competition continues to increase in most real estate investment strategies, the above statement only becomes more true. This is when you either decide to cross your arms, put on the pouty face, take a seat on the sidelines and complain that “it’s too hard to find a good deal.” Now is the time to read between the lines of the spreadsheets and look at the properties in ways others may have missed. By using creativity, you can see the opportunity for value that a spreadsheet cannot communicate.
Example #1: The House With a Blocked Basement
A great simple example of this is a property I recently purchased — a 900 sqft, 2 bed, 1 bath house. That house sat on the market for a very long time because its kitchen was so functionally obsolete. There was no apparent way to remedy the kitchen due to the size restraints of the house and the floor plan limiting expansion.
The owners of the house had a fridge in the kitchen, but it completely blocked the basement door. To enter the basement, you had to pull the fridge out, open the door, and then push the fridge back once you were done in the basement. This made doing laundry, which was in the basement, a nightmare.
Every investor knew this house would demand a far lower rent or sales price than all other, similar houses in the area because of this functional obsolescence. Fortunately, through creative lenses, we were able to see that the basement stairs could simply be unscrewed and spun 180 degrees to make what was a closet the new basement entry. This freed up enough space to allow a fridge, dishwasher, and additional cabinets in the kitchen. I was able to get the property at a great price and with some minor changes, allowed this property to be a fantastic investment. It seems so simple once it is done, but somehow loads of investors looked at the property, ran the numbers, and let it go.
Example #2: The Apartment Complex With Creative Opportunity
A larger scale example of creativity being greater than analysis was on our company’s recent purchase of a 42-unit apartment complex. We were able to get our offer accepted over multiple bidders because of the creative opportunity we saw in the building that the others missed. During our walk through, with our background in contracting, we realized the water lines were run individually to each unit for both hot and cold lines with their own hot water heaters in the units. The landlord was paying a $29,000 water bill each year.
During due diligence, we found that it would cost us only $200-$250 per unit to put wirelessly read sub-meters in each unit for water. This would allow us to have all water billed back to the residents, which is common practice in the area. With rents being slightly below market, we were confident that adding water bill back to residents would not drive everyone out. And lastly, we found from other large investors in the area that total water consumption decreases 30% when tenants are responsible for the cost of water. This means you decrease your expenses by X, but you only increase the residents’ cost of living by 70% of X.
In addition to the sub-meter opportunity, there were 8 total 10’ x 13’ common area laundry rooms throughout the complex. Only four of these were being used, and the others were empty, locked, and the current owner never had the key.
During due diligence, we surveyed every resident and asked, “What would make your living experience better?” We had a large amount of residents request extra storage space, which was not available. We then followed up by asking them, “If a 30 sqft storage unit was available in the building for $29 a month, would you rent it?” Many residents said yes. This meant the unused, old laundry rooms could be remodeled into storage units for rent. Four rooms were doing nothing as they currently sat, so all we had to do was spend $500-800 dollars to have some basic storage units built in each of them. The other four would come later.
And lastly, each unit was equipped with washer and dryer hookups in the units, but coin laundry was the only option available for residents to rent. The current owner said they did not rent individual washer and dryers “because the residents would run a load with one shirt in it, and the cost of water wouldn’t make it worth the rent you’d receive.”
After the year or so it will take to transition all residents onto sub-metered water, we will be left with another opportunity in year two to remove the coin laundry from the common areas, fill those rooms with storage, and begin renting individual washer and dryers to each unit.
This process will take over 24 months to complete. All the while, we will never raise rents one penny. With our rents only being 17% of the median household income, we are comfortable even with these additional optional expenses that our residents will not be over extending their means. Through this, the value of our property is projected to increase close to $425,000.
This is why I now say spreadsheet analysis is a commodity. It is basic math that everyone can do. There are free spreadsheets online to plug in the correct income and expenses in the correct slots to pop out a value. The real value in an investment comes from creativity between those lines to force value. It’s about seeing value that has been left unnoticed for years and exposing it.
Analysis is important, but it is not the be-all and end-all. True value is found between the lines. Take the time to see the property for what it can be. That is where you will add value and boost returns.
Investors: How do you find deals that no one else sees? What’s the latest deal you’ve landed that other investors passed by?
Let me know your creative strategies with a comment!