- Mitchell England
Updated: May 17, 2022
Within real estate investing there are a lot of directions one can wander. One could flip properties or build properties, buy and hold land or develop and sell lots, etc. There's a lot out there, and because of this many investors become confused on what path to follow. While any of these strategies can be profitable, I think there is great value to defining the strategy you will follow to create value.
In our business we stick to one well defined strategy, which we use to create cash flow, wealth, return capital and do it all over again. We call this "The Play".
So what does this strategy look like?
Deal, Partnership, Execution, Return, Optimize, Return, Return, Return...
Ok I'll admit, we didn't create this strategy. Successful investors have been using it long before we stepped onto the field. But we do have our own approach... our own flavor if you will. So here it goes.
It all starts with the deal. We look for deals which return good cash flow day one and can be improved as we increase revenues and decrease expenses. We always look for opportunities to make small changes to optimize the Net Income. Remember as net income increases annually, the property value increases by approximately 10-20 times. So long we can optimize the profit/loss, we are able to increase cash flow and increase the value of the asset.
After identifying and going into contract on a deal, it's time to put your team together. You should already have soft commitments from people you know and trust and who can bring something to the table. This could be capital, operational experience, etc. In our business we have an awesome team for operations, deal finding and capital raising!
Once you close the property, it's time to execute on the business plan. Every property will be a bit different, but all share a common theme. The goal is almost always twofold and includes the following;
1. Improve Tenant Lives - Address health and welfare issues, alongside property aesthetics.
2. Improve Financials - This includes increasing revenue and decreasing expenses. Even small changes to the profit/loss and increasing NOI has a great effect on cash flow and the overall value of the property.
**Note, it's during the execution phase which value is unlocked! Take for example, you spend $100k to improve health and safety as well as improve the aesthetics of an asset. Alongside these changes you also decrease expenses by $2,000/month and increase revenue by $2,000. This is done by increasing rents, passing utilities, adding storage units, negotiating new management, fixing leaks, etc. By sending another $4,000 to the bottom line monthly, you increase NOI by $48,000 per year. Not only does this add to you and your investor's monthly cash flow, but it also increases the value of the property substantially. If your property is located in a 6% cap market, this increase in value would equal: $48k/.06 = $800,000.
Many investors consider a return of capital to include the sale of the asset and the subsequent return of capital after fees and debt are paid. While this is one way to return funds, it also has its pitfalls. Selling a property is expensive! Brokerage fees, state transfer taxes, title fees, state and federal taxes, prepayment penalties, etc all add up very quickly.
So instead of selling, we prefer to refinance as a way of returning capital, while also retaining the asset. So long the business plan has been executed correctly, there's a good chance a refinance will return most if not all of the initial capital into the deal. This is an amazing model, because it is a tax free model! Cash received due to a refinance is debt and therefore does not have any tax implications.
The "Optimize Phase" can also be called the maintenance phase. In other words, it's the optimize phase includes operating the property in an efficient way over time. Optimizing means continuously looking for cost savings, while also pushing rents each year to keep pace with inflation and the surrounding market. During the optimize phase, you should be taking distributions and should also see these grow each year!
Return, Return, Return
Ok so what does Return, Return, Return mean? We'll if executed correctly, this is what you should expect over the life of an asset. You should expect returns via distributions and tax free returns via refinances as you own the asset into the future. Remember, as your asset grows in cash flow and debt is paid down by your tenants, you can responsibly refinance to unlock tax free cash! So this is what this phase is all about! It's about returning tax free cash over and over throughout the years!
So... that's The Play and that's how we increase cash flow, increase wealth and take care of our investors. It's not that I'm claiming this is the best method out there, but it's pretty awesome! So define your approach, your strategy and get clear on how you will go from Zero to 100+ Units!