Simple Tools for Creating Value (Part 4 of 5)

Creating value in real estate is not a mystery.  This week we explore 7 more keys to creating value.

11) Refinance – We are able to withdraw cash through periodic refinancing (Equity Take-out). This equity take-out is tax free money back to the investor so long as it is reinvested in another legitimate investment vehicle.

12) Asset Protection – A comprehensive and well-structured building insurance policy covers all manner of calamitous events and is another form of risk reduction. Even if the building would be completely destroyed by fire or earthquake, with correct insurance it would be replaced in “as new condition.” Additionally, having rental loss insurance would cover any losses from business interruption until such a time as the building was re-built and in operation equal to the period before the damages. Finally, limited liability insurance and proper corporate structure insulates the investor from specious third party lawsuits. As an aside, how many investors in securities or mutual funds over the last decade would have liked to have such protection from down-side risk?

13) Inflation Hedge –Real Estate investing is one of the few investments that hedges against inflation as the cost of goods go up, so generally does Real Estate.

14) Demand – People always need a place to live. Shelter is one of the basic requirements of life. You can be assured knowing that there will always be demand for residential housing whether the market is up or down. (see Business Cycles below) There is always a demand for good, clean, safe, aesthetically pleasing and affordable housing.

15) Affordability –Apartment Rentals are considered affordable accommodation and many jurisdictions limit the rent increases to maintain affordability. While rent restrictions limit the up-side of revenues, it almost guarantees that apartment rentals remains “affordable” to most incomes and in so doing maintains that they will always be in demand.

16) Business Cycles – Multifamily investments are one of the few sectors of the investment space that are sheltered by traditional business cycles. As the economy slows people need affordable housing and as the economy pick up landlords typically increase rents as demand increases through this cycle. Economic downturns creates tenants seeking affordable housing. Inflation makes home ownership unaffordable and we gain new tenants seeking affordable housing. Note: rising interest rates benefits landlords as homes become less affordable which simply increases the demand for rental housing.

17) Maintenance –We ensure that our building are always well maintained, and pro-actively managed to ensure that we maintain and increase the value of the building. We take great care to ensure that our units are clean, quiet, well-managed, aesthetically pleasing, and comfortable and the best offered in a neighborhood. We aim for “near-condo quality” in our market segment and we can usually demand a premium for our units. Typically our rents are 5 – 10% higher than our competitors.  Additionally with apartment investing our maintenance costs are spread over a number of units thus utilizing “Economies of Scale”. We have an onsite maintenance person who looks after repair issues on an as needed basis.

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