Seasoned Investors Use Manufactured Growth Plus Highest and Best Use
Today we are going to talk a bit about advanced real estate investing techniques, those that old dogs like me know and some of you new guys and gals should keep your eyes out for!
A seasoned investor loves to create their own increase in property values. They do this simply by making the highest and best use of the property and manufacturing their own growth.
Buying a property that generates income is a dream of many and certainly all investors. The seasoned investor however has a much deeper plan for the investments other than simply realizing returns. They understand that every real estate investment should, at the time of purchase, already have the ability to not only be self-sufficient but also cover all of its own expenses. BUT, after this initial requirement, they want it to go on to amass a much larger return.
These advanced real estate investing techniques can go a number of different ways. Let’s look at a few examples:
Advanced Real Estate Investing Techniques Example #1
You, as a seasoned investor does, buy a property that has been run down and is generating only a 50 to 60 percent occupancy rate. This property is not running at its highest and best use. As income properties are valued (and therefore priced), based on the income it generates the price of the property should be relatively low.
Then as you come in and turn it into its highest and best use by putting in good property management and doing some basic improvements, you have now created a place that will be more desirable and therefore demand higher rents. Additionally, now that the place has more desirability you can easily bring the occupancy up to the required 95 to 100% that it should be. With the increased rents and the increased occupancy you could essential double the income and profits.
Now that you have doubled the profits the value of the property also increased considerably. A seasoned investor or big time real estate and investment firms do this every day. I just read an article about a 181 unit apartment building down the street from me that did this very thing. They bought the property, turned it to its highest and best use and increased its value by 5 million dollars between 2010 and today in 2012. 5 million dollars during a down economy is a great increase. You may opt to do this on a smaller scale, but you get the idea of the possibilities.
Advanced Real Estate Investing Techniques Example #2
Here is a smaller scale example. This is true property I purchased 10 years ago as a seasoned investor. The purchase was a four unit apartment building in the suburbs of Minneapolis Minnesota. I paid $364,000 for the 4 unit. To put it to its highest and best use, the next month I hired an architect to give me an architect’s opinion on the property. I hired a surveyor to survey the property and I hired an attorney to draft the paper work. This was all done to convert it from an apartment building to 4 individual condo units, complete with declarations, bylaws and Condo docs.
So the purchase price was $364k (including all acquisition costs). I spent roughly $7,500 to hire my surveyor, attorney and architect. By separating these 4 units into individual condo units I was able to increase the value considerably. This was the highest and best use of the property. The process took about 4 months. During this time I had the property rented out and was enjoying a 9 percent return on my money. I did not purchase it however for the 9 percent return. I purchased it for the manufactured growth possibility. After a 7 month time frame, I sold these units off for $175,000 apiece. $175,000 times the 4 units equals $700,000.
The increase in property value was $336,000 less the $7,500 in professional fees to convert to condos and less another 6% or ($42,000) in liquidation cost, meaning that I manufactured $286,000 in 7 months time. This $286,000 was much more important to me than the 9% return I was getting on my annual returns. This money represents manufactured growth and it allowed me to further leverage more investments.
Side note: this was a very rosy deal as the property was acquired with only $16,000 cash out of pocket and the rest was financed. Acquiring this for such a small amount of cash is a story for another day, but illustrates possibilities when you actively create them.
These stories are not intended to impress you but rather to get you thinking of possibilities on how you too can manufacture growth. I have hundreds of stories like these and love to work them. If you have opportunities run with these kinds of advanced real estate investing techniques, do your diligence and capitalize big.
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