Investing in Real Estate; Income Approach, Value Approach

Income investing



Years ago my brother Bill and I owned a beach house on Fort Myers Beach on Third Street, just down from Moss Marine. Buying it was a story in itself. At that time Bill and I lived next door to each other on Philips Creek - we had purchased 9 acres off route 41 and with two other partners developed it into 12 building lots and we each built houses on a single lot that we kept from the development.



Often on Sunday mornings Bill and I would have coffee and then drive around and look at property. One Sunday we decided to go look for a boat slip to buy to keep our 23 foot Mako fishing and diving boat. We were touring around boat slips off of San Carlos Boulevard when I spied a slip with a for sale sign on it.



Yes, this was already in the time of cell phones and by 10 AM it was a decent hour to call Marty Wallerstein, the agent. Marty informed me that the slip was actually part of a home sale across the street, but why not buy a house on Fort Myers Beach that came with a deep slip and the house could be rented? He had just such a house for us to see that morning.



Long story cut short, Bill and I had that house under contract within a few days – it was a triplex formally owned by Paul Rosen, developer of Marina Village. We wound up setting up a partnership with two friends from Scotland to buy this house and set up a usage sharing plan and enjoyed that house for years until we sold it about 8 years ago.



While owning that home I was accumulating rental properties on a regular basis. Knowing this, one of the local Realtors called me one day to talk to me about buying the home across the canal from this one.



Bill and I had paid $165,000 for the Third Street Triplex and we were receiving about $21,000 in rents. This agent pointed to the home across the canal and told me that the owner was asking $300,000 for the home.



“What are the rents?” I queried.



Just under $16,000, he replied.



“Well then what makes you thing it’s worth $300,000?”



“It has a view of the beach and is on the water,” he replied.



Need less to say I never purchased that property. What the agent failed to realize was that the value of the “view” and “the water” were not reflected in the rents and I was an income buyer. I was not going to pay for them if they would not make me money.



Making money in real estate happens in two ways; appreciation which is realized upon a sale, and income that is generated during ownership.



Investors in income property become familiar with cap rates, internal returns on investments, cost of , and the advantages of leverage. They learn how to maximize returns while minimizing expenses and increasing income. An income investor values his purchase solely on income stream. The view of the water is only important if it will increase his rents. If, on the other hand, there are two opportunities available with the same cost and same return yet one has an advantage of a superior location ( a view, for example), then buy the one the location advantage.



Over the years I have developed an Excel spreadsheet with which I analyze each potential rental property. I will factor in reserves for capital expenditures, maintenance items allowances for vacancy and credit losses and variances in rents. I allow for depreciation, tax benefits, and interest and insurance costs. I will also estimate appreciation based on increased rents over the expected term of ownership. All this analysis boils down to this: What return can I expect on my investment?



In today’s South West Florida real estate market there are abundant income investment opportunities for the small investor, including single family homes and duplexes; purchases that offer not only cash flow, but a healthy return on investment. These investments often do require active involvement in the property.



Value Investing



For the larger investor, value investing is a wise approach in today’s market. To me value investing involves determining the underlying value of the property either on a replacement basis or on a stabilized income approach. Value investors buy a property at less than its intrinsic value, then restructure the financing or the intending use, for example, to speed up the return of value. They are long term investors and don’t highly leverage..



Our market is rich with undervalued properties; many of these would also fit will into a contrarian strategy –buying what other investors do not want. Value investing takes more cash, more patience, and more research. Often these properties are more financially stressed than physically stressed. They are often improperly positioned, or struggling under the former owners’ expectations.



Take for example a waterfront development that has failed to go vertical. A value investor may buy this at a much reduced land load per expected vertical improvement, and then restructure the offering from a high rise condo community to a fee simple town house development. Or a value investor may buy a failed condo conversion and restructure the property senior housing; or buy a hotel, change the flag, and reposition the pricing; or buy an empty bank building and turn it into medical facility.



Sometimes all the investor needs to do is add the element of time. We are over built in retail and office.. Investors today can become the low cost provider when they purchase right and be poised for high returns as the market recovers.



For the commercial investor I see value plays in these areas:



Retail



Hospitality



High end Residential



Condos



Industrial



Office Space



Land



Bank Buildings



Restaurants



In addition to the above opportunities, anytime you can buy a single family home well under replacement cost your chances of dong well greatly increase. We are selling homes as much as 50% below their replacement costs. Interestingly these value plays also meet the income approach as well.



Please consult an experienced real estate agent anytime you are looking to invest.