The Whisper Price

Every owner wants to sell their property at top dollar- totally get it.

But,

How do we close the rift between their ideal price tag and the price we need to acquire the property?

Sometimes we can't- keep it friendly and keep it moving.

For the others, we (or our broker) need to walk them through how we're envisioning the project, the costs associated, and the time needed.

These are generally smart people who understand real estate operating costs- they'll (sometimes) see that we won't be paying the same overhead as them.

The hope is that we walk them down and eventually get to the "realistic" price they had in mind.

Ie.) "Upon close, we'd enter a 3-4 month permitting period, would need to execute at least $X in renovations (specifically to Units B and C, which aren’t metered) that would require at least 6 months, all before sourcing tenants and making our first dollar. To add, the purchase would trigger a re-assessment of the property taxes and incur much higher insurance costs than current, which were fine with so long as we can agree to a number that makes the project worthwhile for us."

-We walked them through our strategy

-Demonstrated that we know what's wrong with the property and are able to solve the issues

-Highlighted the assessments/insurance jumps that would occur post close to convey how our operating expenses will differ

-All while, substantiating our own offer price

From here, it could be a game of back and forth or a quick hang-up after the phone call.

You never know and that's why it's important to keep taking reps.

Setting the Tone for Your Spaces

We consistently look at apartment buildings and one constant theme is the poor condition of entryways and communal spaces.

Outside of servicing maintenance requests in a timely fashion, one of the biggest things owners can do to show tenants they're not sardines living in a box is to have incredibly nice common areas.

Common areas and entryways are often the first things people see when entering a building and are a reflection of you as the owner.

You want residents to be proud about their space and feel cared for.

Small things like:

-FF&E (Furniture, Fixture, Equipment): Choosing quality light fixtures, furniture, art, mailboxes, you name it.

People can sense cheap, don't stick a recycled light fixture from a previous project on the ceiling.

Nobody wants to get rained on while grabbing mail- make sure that doesn't happen.

The buildings we target don't have amenities such as pools or workout centers but the same concept applies.

-Cleaning: Having these spaces polished on a scheduled basis- straight forward but make sure that air duct 15 feet up on the ceiling is getting hit.

-Landscaping (you can actually add value to your property here): First, cut lawns and trim trees on a scheduled basis.

Next, get creative if you're able to.

A few well placed shrubs, trees, and (quality) outdoor furnishings can change the entire feel of an outdoor space.

Nobody wants to get splinters from a cheap bench while sitting in direct sunlight.

If they do, you're planting a seed of resentment and probably less likely to get that renewal request many months before the lease expires.

-Security: Straight forward but crucial.

Exterior surveillance cameras, night-time security lights, walkway lighting, etc.

You don't want people walking in the pitch black.

These little things can be a driving force in keeping residents happier and renting from you longer.

Refining Your Menu

Recently had a phone call with a close friend and was discussing the current real estate market.

Started to mention the type of deals that we can take on and was quickly asked to explain what each one meant.

He can't be the only one.

So, here's a breakdown of the different terms.

These define the risk and reward characteristics of a real estate investment- ordered from lowest to highest risk.

1.)    Core: Core properties are typically stable (occupied, generating income) low-risk investments that require minimal renovations. Investors looking for long-term, low-volatility assets often opt for core properties.

You’re likely paying a premium for the asset as much of the work has been done for you- some are just fine with that so long as stabilized yields justify the check.

2.)    Core Plus: Core plus deals are usually occupied and generating income like core properties, but provide opportunities to add value through cosmetic improvements.

Think paint, countertops, vanities, lighting, fixtures, tile, landscaping, etc. (though necessary repairs will likely be needed as well).

You aim to increase the property's efficiency, aesthetic, tenant satisfaction, or curb appeal, without changing major structural components.

In turn, you hope to achieve higher rents for the work rendered.

Lower risk and often lower returns when compared to more invasive strategies detailed below.

3.)    Value-Add: Value-add properties require significant renovations or improvements aimed at returning the asset back into commerce and maximizing value/income potential.

These assets often have little to no income at the time of acquisition and years of deferred maintenance.

Think of that house with the caved in roof that you occasionally pass on the highway- that would qualify as value-add.

These projects are where you can implement your vision for a property.

Gut interiors, re-work floor plans, replace/upgrade MEP, new windows, replace exterior facades, etc.

Larger risk profile than core and core plus, but potential for higher returns given the larger scope of work.

4.)    Opportunistic: Opportunistic investments are high-risk, high-reward ventures that involve ground-up construction or the repositioning of an asset (think office to multifamily conversions).

What makes them so risky?

You’re creating something out of nothing.

Meaning, you’ll need to tie up the site, perhaps re-zone or combine parcels, ensure you can build on it (phase I, soil tests), solicit input from neighboring properties (one angry neighbor can add 6 months to your projected timeline), and go through an extensive entitlement process before a shovel hits the ground.

Many have done extremely well in this space but it’s the riskiest approach and one with the most downside risk (budgeting is crucial).

Each type carries its own set of risks, rewards, and considerations.

Just a matter of matching skill sets and risk appetite to what’s needed in the respective project.