Creating value, protecting capital by knowing how to buy rightMay 3, 2019
In real estate, disciplined investing starts with buying right. Profit can be created by finding properties in the right location, at the right time, but, most importantly, at the right price. After all, the price you pay for a property is the foundation of its investment success. In fact, by going the extra mile to avoid overpaying for a property by adhering to stringent underwriting standards and assumptions will not only filter out mediocre investment opportunities, but help assure that projected returns are met or exceeded.
So, just how do you buy it right?
Focus on underperforming properties in good-to-superior physical condition with little to no deferred maintenance.
Preferred properties have the following criteria:
- Have untapped income potential in the form of a favourable gap between in-place rents and market rents;
- Have stable tenant bases; and
- Have healthy turnover and low/tightening vacancy rates.
It’s a good idea to build quality relationships with private property owners, as once they are ready to sell their buildings, you may be the one they contact first. This active acquisition strategy could result in an opportunity to acquire properties off-market, avoiding the bid-up process that tends to occur when properties get publicly listed.
Active Management Strategy
Once a building has been acquired, an active value-added property management approach helps to limit downside risk while providing unlimited upside potential. This strategy allows for the unlocking of “trapped” value through targeted improvement plans that enhances the overall tenant experience, which, in turn, generates higher rents and ultimately increases property values.
Active management can focus on maximizing income and creating a stable stream of cash flow from properties by:
- Performing regular market analysis to ensure rent revenue is maximized;
- Conducting expense-reduction initiatives;
- Ensuring ongoing operational efficiency; and
- Increasing non-rent revenue.
We have seen firsthand that improving customer service and a property’s appearance and condition can command excellent increases in rents. For example, better on-site management that takes pride in the building and focuses on a positive tenant experience, and upgrades to kitchens, bathrooms and common areas have all proven to be successful strategies in our past investments.
Although a “buying right” acquisition strategy is an essential part of creating value, it’s only part of the recipe for successful real estate investing. An active management approach is the other key ingredient to success.