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Even though the housing market has seen strong price increases over the last few years and many real estate investors have benefitted from rising rent prices and property prices, this doesn’t mean that you don’t have to put care into finding the right real estate investments. In other words, you can’t just invest in anything and expect to get great returns. The key is who the sponsor is and how they operate the properties and investments.
Here at Blue Lake Capital, we have found a number of secrets over the years that help to extract maximum value from real estate investments. In this blog, we are going to go over some of them so that you evaluate if your sponsor is getting you the best return on investment possible for your real estate investments.
3 Secrets to Extracting Maximum Value from a Property: 1. Don’t go off your gut feeling. Analyze numbers.
Listening to your gut feeling is useful as a preliminary screening tool. However, it is not enough to base your investing decisions off by itself. You should always analyze the numbers. No matter how beautiful a property is, or how much your gut might chime in, it’s just plain smart to make your decisions based on the numbers It’s important to ask your sponsor what steps they’ve taken in conducting their market analysis and if you can see the data and findings they’ve collected. While you shouldn’t have to do this yourself as a passive investor, it’s still helpful to know what really goes into doing a thorough market analysis. Here at Blue Lake Capital, these are the steps our team implements, just to give you an idea and expectation of what type of data a sponsor should be sharing with you:
First, we familiarize ourselves with the property by looking at the website for the property, as well as the offering memorandum (OM). Next, we create a spreadsheet to track the comparable nearby properties (“comps”). We get this information from high-quality software providers like Axiometrics. We take the comp info and fill out the spreadsheet by property name, address, year built, distance, and amenities as the subjects in the top section.
While it’s good to get high-level data, we don’t always take it as accurate and always check for ourselves. We call the comps and pretend to be a prospective renter. We tell them we’re interested in an apartment and expect to move in about 4-6 weeks, while looking at the floorplans on the website.
When on the call, we get the square footage of the units they have available and the rental rate. We ask about the 1- or 2-bedroom units first, and then up to 3 if they are on the property. Through our investigative efforts, we discover if there are upgraded units, and what those have to offer. This gives us very good information on what is helping these properties achieve their asking rents. All of this information is captured to help us better develop the scope of our renovation plan should we move forward with buying the property. We also ask about the utilities and other add-on fees commonly used in apartments. For example, what is included in the rent price (water, sewer, pest control, valet, trash, etc.)? How much does it cost for 2 pets? Are these fees monthly or a one-time fee? Parking is also an area where you can frequently increase income, so we ask do they have any assigned parking and detached garages, and if so, how much do they cost? Do they have free surface first-come, first-served or only street parking? Do they have any move-in specials? The reason behind this is we must identify the actual base rent price, as opposed to the enhanced one through additional add-ons. After all of that, subtract the cost of W/D and utilities if they were included in the price given by the representative, in order to get to the We then compare the base rent with the property rent prices for the asset we’re evaluating to purchase. If an asset is under market price, yet reasonable similar to the other properties, that presents a significant opportunity to implement a value-add strategy. (W/D- $45, Trash- $10, Pest control -$5, W/S- $40).
2. Be creative
Good sponsors read the market. It’s important that a sponsor finds out what services are offered and what tenants need/want and also, charges fees. For example, we have offered shared office space in the leasing office and charged non-tenants monthly fees. Another example is when we charged condos adjacent to the property a monthly fee to access our pool and gym. A strong sponsor will know how to extract extra value from your real estate investments by being creative and finding more ways to generate revenue with the property. This ultimately helps to drive higher returns for investors.
3. Do things differently
A strong sponsor will know not to necessarily do something just because the entire market is doing it in a certain way. For example, you can save costs by buying used package lockers. We did it on one asset and saved over $20K from another client of a project manager we hired. They were looking to get rid of a new-looking and very well-preserved package lockers, and we coincidentally were in the market to buy some. Sharing this type of information with your team is helpful because you never know who is going to stumble into an opportunity that can be seized to help complete the project on and or under budget. Another example could be painting units you renovate in-house instead of hiring a 3rd party. A strong sponsor will know they don’t have to be afraid to be different if it means being right. Conclusion
Finding the right real estate investment begins with finding the right sponsor., Ideally, this can help to generate cash flow reliably for many years for you. Also, this cash flow will likely increase as rent prices increase. If you partner with a sponsor who uses the right strategies, such as the ones mentioned in this blog, then you can extract maximum value from a real estate investments. Don’t be afraid to ask a potential sponsor how they evaluate markets, if they are creative, and what they do differently. These answers will help you identify whether this is a sponsor that knows how to make the most of your investments.
Want to Invest with Ellie Perlman and Blue Lake Capital?
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About the Author
Ellie is the founder of Blue Lake Capital, a commercial real estate investment firm specializing in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.
Ellie is the host of REady2Scale, a podcast that highlights the assets, processes, and strategies for the multiple approaches to successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.