The Commercial Real Estate Alpha Site

In our experience, the typical real investor is someone who does not have an affinity for any one form of investment. He may be interested in multi-family apartment buildings or single-family rentals, or he may have an interest in commercial developments like office buildings or warehouses. Maybe he’s also considered flipping homes. In any case, this investor is typically very skillful on the acquisition side. He knows how find the best deals and negotiate the best prices. But it’s unlikely that they excel in all five phases of investing.

The most successful real estate investors and entrepreneurs truly know how to navigate all five phases, from purchasing, to managing, to stabilizing properties, and then facilitating dramatic growth before executing a sound exit strategy. As a property manager, it is critical that you also learn how to navigate each of these phases because, when you do, you can generate a volatile-proof income that will remain stable regardless of the current economic cycle.

As I go into detail about each of these phases, I want you to pay careful attention to the ways each phase compliments the others and how making a mistake in one phase can drastically impact another. For example, if an investor over spends on a property or makes another mistake during the acquisition phase, it is going to be much more difficult to stabilize the property and achieve growth. On the other hand, if the investor makes a wise purchase but then mismanages the property (i.e. by not hiring an experienced property management firm that can implement the proper systems) he will sabotage his stabilization phase, ultimately crippling his ability to enter the growth phase.

Now that we have a general overview of the five phases of real estate investing, let’s take a closer look at each one individually.

Implementation & Stabilization:

Stabilization occurs after systems have been implemented and the owner is ready to adequately address the property’s income and expenses. In order to accomplish stabilization, the property manager needs to control several key components:

1. Occupancy: Occupancies are primarily controlled by having a strong grasp on the prospect tenant and putting in the necessary legwork during the strategic evaluation of the target area, which will ultimately help us to have a better understanding or your property’s core demographic. Understanding the demographic will then help us control occupancy rates because we understand the types of units the demographic is looking to rent and how much they are able/willing to pay.

 

2. Rental Rates: Understanding where to place the rental rate is a skill that is highly overlooked by many landlords and property manager. Again, the SEOTA analysis will quickly determine where to set the rental rates, thanks to the clear picture of the prospects and their demographic/psychographic profile. Additionally, we also consider age of the property, overall condition/maintenance of the property and location of the property.

 

3. Turnovers: Losing a tenant, for any extended time, will have a negative impact on future cash flows. This is magnified with single-family units, as single-family properties have only one source of income. Think of it like this: If owner A has a single-family rental home and he has a vacancy, he has a 100% vacancy rate. But if Owner B owns a duplex rental and she also has one vacancy, his vacancy rate is still just 50%. Owner B reduced his risk by 50% by owning just one more unit and benefiting from the ability to manage both rentals located in the same place.

 

Ultimately, by owning just one more unit, Owner B benefits from the economy of scale that accelerates his rental return. For further illustration of this concept, think back to the game Monopoly? This game taught us that five green houses would equal a greater cash flow than one producing red hotel. Essentially, this taught us that an investor will want to start with a single-family home, but that they would eventually look to move the cash flows into a greater-producing income property that benefits from larger scale. The smart investor with the red hotel also benefits from the ability to manage the assets on a single site, versus having five single-family homes spread over a given geographical area.

 

4. Delinquencies: Delinquencies can be drastically reduced by understanding the prospect tenant in advance. This due diligence process gives us a strong grasp of the prospect tenant, and when a we truly understand the prospects, we can begin to set qualifying criteria that will help eliminate high delinquencies, turnovers and the high cost of evictions.

 

5. Maintenance Budgets: When performing the due diligence process, we covered in detail how to evaluate each rental unit. When evaluating the rental units, we have an inspector/maintenance technician walk several rental units with us. This process allows us to do two things. First, understand the overall condition of the rental unit to help set true value of the rental property. Second, allows us to understand future cash flows by forecasting maintenance issues that will arise in the near future.

Exit Strategy:

The final stage of real estate investing occurs when investor determines that he has reached his desired return on investment. Once this phase has been realized, he can either sell the property, re position the returns into a greater investment or cash out.