To be successful in real estate through all the market cycles, you need to be able to add real value to real estate deals. The more ways you can add value, the more you will succeed in differing cycles and markets.
There are four major points in a remodel project where value can be added:
3. Execution of the Remodel
4. The Exit
Ideally, we would add value at all four of those points. Realistically, market cycles dictate where the largest value-add opportunities exist.
So how can you best add value?
In some ways, real estate investing is about solving problems for the people involved. For example, we add value by solving a sellers’ liquidity problems by exchanging cash for a property that is causing those liquidity problems. Or, we are solving a relationship problem that a house may be exacerbating.
In order to solve those problems, to add that value, we must put ourselves in front of the right sellers at the right time with the right solutions. This is how we add value to the acquisition. The better we solve the problem, the more value we add to the deal.
Adding acquisition value requires effective lead generation, creative problem solving, a mastery of the numbers, and effective negotiation. During the past two years of economic stimulus and plentiful cash, it’s been especially difficult to add value at acquisition because houses are perceived to be more valuable than cash.
Effective lead generation systems have been especially valuable and important during this cycle, because that has been critical to finding the rare deals in a strong seller’s market. Now that the fiscal stimuli are winding down, inflation is rising, and cash isn’t as plentiful, there will be more ways to add value at acquisition by creatively solving problems, mastery of the numbers, and negotiation.
Can you leverage the current economic stress to negotiate in value at the purchase?
Cash solves real estate problems. Accessing cash is one of the most important ways of adding value to a real estate deal and an entire hard money industry has grown up around the single value add proposition of adding that value.
While acquiring properties has been exceedingly difficult the past two years, there have been more opportunities than ever to use other people’s money to do so. As the market cycle shifts, cash will become more restrictive and adding value with financing will become more of a competitive advantage for those who have built strong balance sheets, reputations, and relationships with lenders.
Do you have access to capital that will help you overcome the tightening of hard money and rising rates?
Adding value with construction is the most difficult way to add value, but it’s also the place in the value add chain where there is the least competition and the most demand through every market cycle.
At some point in a real estate investment, someone is going to have to actually improve the property and those with a strong construction ecosystem will be able to create value in any market condition or cycle. While we are always trying to find new ways to add value at the acquisition, financing, and exit, I know the most valuable and lasting competitive advantage is the ecosystem that executes the construction projects.
As financing becomes more restrictive and demand decreases, adding real value with real construction becomes a more valuable opportunity to add value. While remodelers have struggled to compete with speculators in the latest market cycle, I believe it’s going to be difficult for the speculators to compete with remodelers in the next cycle.
Can you build a construction ecosystem that adds value in any market?
In 2010, it was easy to buy and difficult to exit. In 2021, it was difficult to buy and easy to exit. 2022 is marking a transition and exiting is becoming more difficult as interest rates and affordability issues are decreasing demand.
The 15-20% appreciation we’ve experienced over the past two years has papered over many cracks. Not only has there been appreciation, but there’s also been a lot of institutional buyers that can purchase without positive cash flow.
Not enough has been said about the effect institutional investors’ insatiable demand for rental inventory have had on real estate. It will be interesting to see if they continue purchasing in the absence of short term appreciation. Appreciation that has been realized at the exit has allowed many to get away with poor analysis and sloppy execution of construction. The market has made it possible to create margins in real estate without adding real value.
In the words of Elon Musk, “Money has been raining down on fools.” With the abrupt deceleration of appreciation, those days are ending and speculation alone won’t be a sustainable strategy. Real estate investors will have to add real value, because of appreciation, and speculative buyers may not be there to bail investors out at the exit.
Can you leverage a real estate license to add value to the exit?
Real estate is constantly changing and every cycle brings new challenges and opportunities. What worked last year won’t be enough next year. That’s what makes this business challenging. It’s also why the prize ultimately goes to those who are the best problem solvers.
The current changes in the market present new problems to solve. Without appreciation, margins will have to be earned by adding value in other ways.
Aligning the new problems with the solutions you can personally leverage will help you seize the opportunities in this changing market.
What are your competitive advantages and how will they best align with the new problems and opportunities?