907: Value Add vs. Appreciation, Trailer for Season 10 + Happy Holiday Wishes!
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00:01
Welcome to Episode Seven of Season Nine of the Growing Empire Show. Today we're going to talk about the difference between value add and appreciation. We're also going to talk a little bit about what to expect out of season 10 at the start of the new year, so make sure you stay tuned.
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Welcome to Growing Empires hosted by real estate entrepreneur, and trusted investment advisor, Jennifer de Jesus. Growing Empires provides insight to building wealth through passive income producing real estate investments for those who want to build and manage a more profitable real estate portfolio.
00:39
So value add and appreciation, what is the difference? Value add, simply put, is the money invested to create an increase in value and it can be done multiple ways in real estate investing. It could be done by taking a property that's dilapidated, making capital improvements to the property. It could be taking a property and just making cosmetic improvements to the property to make it more appealing to the person that's going to rent or buy the property. We can do value add, sometimes without even creating any kind of maintenance or repairs to the property. Strictly by increasing the cash flow on the building, you're creating a value add component to that investment. So how does that differ than appreciation? I find that sometimes these two topics are a little bit misunderstood. And if they're not misunderstood, they're not associated in the correct manner. When we talk about value add propositions or value add properties. When I have somebody say to me, Hey, I'm looking for properties that are value add, that to me means that your intention is that you're going to take that property, put cash into the property, and you're going to improve the property not only by way of condition, but also by way of habitability, cashflow, increasing rents, decreasing expenses. Maybe taking some landlord paid expenses and turning them over to tenant expenses. But that means that you are looking to do something over a period of time. That to me is value add, over a period of time. Because if we were going to do it all at once, it'd be a flip, right? It would be something that you maybe bought vacant, you added capital to it, you immediately turned it around, and then likely you sold it for profit right on the backside. But here's where that appreciation comes in. How do you think people make money in that investment when they're doing like flips, per se, or their wholesaling properties. They're taking the property, they're adding a little bit, they're creating more value, which is the appreciation, and then they're selling it for a profit. Okay. So they kind of go hand in hand. If they're done, right, they are dramatically different as far as the impact to your cash. So the value add side of it is a very slow and steady race. The appreciation side of it, once is done right, could be a very quick hit to your property. So if I'm taking a property and I take the cash flow from, let's just say $10,000 net cash flow to $30,000 net cash flow, and I did that over a period of three or six months. Well, in three or six months, I've dramatically increased the value of that property. Therefore I have forced appreciation on my property. There's also a difference between forced appreciation and natural appreciation. So natural appreciation is what happens in the economy and over time. And it's impacted by other buildings in that marketplace, right. So if I'm in a development, or if I'm buying, let's just say I'm buying two unit properties. Any two unit in the local vicinity is going to have an impact on the appreciation of my building. And if all of those properties in that area are naturally gravitating to a higher appreciation, or a higher price point, than my building, as well will gravitate naturally to that higher price point or higher value. That's something that is just a regular cycle of the economy, a regular cycle of real estate, it goes up it goes down. And that's something that will happen without you even really having to do anything. When you are now adding capital to the property or you're increasing the cash flow by way of increasing rents, decreasing expenses, and those sorts of improvements to the property. You are no forcing appreciation. The difference between the two is the natural appreciation happens over a time period of several years. And it's like a real estate cycle. It goes up and it goes down and it could it could happen over 5 years, 10 years, so on and so forth. You know, our marketplace has a natural appreciation have about 2% per year. But if you think about 2%, and what that means to the actual value of your property, not much changes from year to year. But if I go back to my original scenario, and I take that $10,000 net cash flow, and in six months, I turn it into 20, or $30,000 of net cash flow, I've now created a valuation on my property that's significantly different. And in some cases, 2 or $300,000, more than potentially what I bought the property for. That appreciation, that force appreciation is also what people are doing when they're creating a wholesale deal, or when they're flipping a property. They're forcing appreciation by putting a cash dump into the property immediately, and then turning it around for a higher value.
05:45
So why I'm talking about these two things is because of this, when you are looking for real estate investments, most people focus very heavily on the cash that I'm getting now today. What is my cash flow? And when you buy value, add, the thing that I find most shocking for investors is that they don't have a perspective of how long they have to wait for that value add to turn around. If I'm buying a property that is potentially not rented, or even if it is occupied, it's likely not occupied with the best tenants paying the max rate. Because if I was an investor, why would I be selling that right? It should be profitable. So keep in mind that you never buy anybody's best investment. So when you're buying a property, with or without tenants, there's going to be some turnover. There's going to be natural things that occur because again, you're not buying some of these best investments. Expenses are going to creep up, whether it's by way of things that happen to the property naturally, like a boiler goes out, or roof needs repair or replacement or the city comes in and does an inspection requires you to do certain repairs or you lose tenants or tenants don't pay. All of those things have a dramatic impact on your cash flow. So when you're buying value add properties and you're looking for that 10,12, 14, 15 whatever percent cap rate that you're actually investing for, keep in mind that you're not getting those cap rates without getting the problems that go with it. And if you were buying premium properties, Class A properties, you wouldn't be getting them at 10, 12, 15% cap rates, you'd be getting them at four or five. So you have to go into the property knowing what you're actually buying, if you're buying things that are lower cap rate, higher price point, higher cost per square foot, more likely to be fully occupied and needing the least amount of work, you also are not buying that forced appreciation. You are buying only a natural appreciation. And the risk is that you don't overspend, right. When you are buying the opposite and you're buying that value add, you're buying somebody else's problem. So you have to go into it knowing that your spreadsheets not going to tell you all the details. You have to go into it knowing that you're going to have to hold that property for a period of time to get it to that point where you are shifting that cash flow and generating that appreciation on the backside. I was just literally doing an analysis earlier today. for an investor of ours that bought some properties a year ago, some of them a little bit more than a year ago. And he's a little nervous, because some of them are showing cash flow, but some of them have yet to show the amount of cash flow that you know, he was expecting. And I had to have a really kind of a matter of fact conversation. Because when we invested in these properties, the goal was to create long term passive income. And we bought properties that were specifically undervalued in the market. So we knew that we were buying other people's problems. I think the disconnect for this particular investor was that he didn't have the capacity to understand how long we were going to be waiting for that cash flow to turn around. And there were some pretty significant improvements that were required on the property right from the onset. But I did an analysis today because he started to panic. And he said, Well, maybe I should sell them. And I said okay, well, before we make any judgment on what we're going to do, we're going to analyze all of the facts, from the money that you have physically invested to the cash flow that is generating on the property to what the value is today. And after I got done doing that analysis, and I showed him that although right now, at the end of year one, we're not generating an abundance of cash flow. We have made a large portion of the improvements in the first year, which is why there wasn't a lot of cash flow, we put money into the property. But now we're about to turn the corner and we're about to be on the receiving side of that money. So I showed him not only what our prediction is for the start of year two, but I also showed him, what is the current value as a property stand today, no more than one year from original purchase. And when I tell you that some of those properties have increased by more than $100,000 in value, one of them was over $300,000. In value, we are talking nearly a 50% return on investment. So although that first year was painful to some extent, because you see yourself, putting in money, putting in money, putting money and not seeing a whole lot of return on that investment. When you stop for a second and look at the whole picture, what you're able to see is that there is nowhere else in the world that you could take your $10,000 and turn it into 20 or 30, or $40,000. And, you know, of course, we're talking more than $10,000 in actual capital investment. But the reality is, is that this is a very similar story from investor to investor. So the point that I'm trying to make is this, know what you're getting into, but make sure that you have the capital to sustain it. Because there is no crystal ball. There is no way that you i or your spreadsheet or anybody else for that matter, can predict exactly when you turn profitable. Unless you're buying a building where you're paying a premium price. And in that case, you're buying Class A and that's not what I'm talking about here. I'm talking about the value add. But if you can have patience, and persistence, and make very logical financial decisions with the help of your real estate broker, a really good quality property manager, I can assure you that there is nowhere else in this world that you could take your money and almost double it inside of a year, maybe two years. Now, not every purchase of a property turns a you know, 50 or 100% return, let's be realistic. But there are some home runs right, there definitely are some home runs. But those people that got those home runs also took a lot of risks. So I don't want you to think that everything is so glamorous, I want to be realistic. So that going into this you know what to expect.
12:15
The episode will continue in just a moment.
12:19
I recognize that as an active investor, you want to implement best practices that drive the highest returns on your profits. Everything we do at Empire is designed to make life a lot easier for you so you make sound decisions regarding your portfolio. Whether that's through this Growing Empires podcast, our company services of property acquisition, construction and management, or by becoming an Empire Capital Fund investor, we want you to be as successful as possible. However, using the right methods is critical to achieving your ROI. There's a lot of advice out there, and it can be overwhelming. Especially if you're using a method that isn't working. Don't take a chance on an approach that may not be right for you. If you want to be sure I can help you assess if your current strategies are a fit to your properties end goals. Book a call with me today to see if there's a better way. Go to JenniferdeJesus.com and click book a consult and I can confirm that the method you are using is the right one for you or suggest a simpler, more profitable alternative. One quick conversation and you'll feel better about the choices you're making regarding your real estate investment portfolio and the value in comparing to long term.
13:21
Season 10 is going to be all about leveling up. And it's how these people took these small small properties, had the patience. Had the desire to create cashflow. Generous cash flow, and create that passive income for that wealth that they're creating, that long term wealth. And they didn't quickly make an adjustment. It wasn't like the stock market where one day we're holding and one day we're selling. This is a real estate investment. These are long term gains, not short term gains long term gains. So you have to go through a little bit of pain. You have to go through the J curve. You know, we talked about this in one of our previous seasons this year. And it's it's the cycle of real estate. And it's like the symbol of how you make a J, you know, it's you start at the top, you have to go down before you come up the other side. And that's exactly what value add real estate investments are. But when you're making those value, add purchases, you're not just making it for the actual cash flow today. You're making those purchases for cash flow tomorrow, and cash flow in a few years. And you're also making it because of the appreciation on the backside. And that appreciation is going to be precisely what we're going to talk a lot about in season 10. And it's how people level up. How do you get from one property or two properties to 500 plus units? How do you transition from residential to commercial real estate? How do you start making very smart financial choices? How do you start investing in 401Ks? How do you invest in mortgage backed securities? How do you invest in opportunity zone purchases? We're going to talk about how you transition from residential to commercial real estate. We're going to talk about the opportunities that are out there like opportunity zone purchases, How to invest in a neighborhood improvement zones? How to take those grants that are available, and how do you take the equity out of your purchase? All of that money that cash and is literally just sitting there untapped. How do you take that equity that you've been patient enough to build up in your value add properties? And how do you take that money and reinvest it and go from, you know, one or two buildings to 10 20, 50 buildings or more. 500 Plus units. I'm going to have the most amazing guests in 2022. Starting with season 10. My first special guest name is Adam Von Romer and he is a commercial guru. This is his forte. He is going to talk all about commercial real estate investing where your money should be placed, how profitable it could be how he got from a couple of units to the millions of millions of dollars of real estate that he owns today and what he's telling his clients to do currently in the commercial real estate investing world. And he's going to tell us all the secrets that we need to know about commercial real estate. We're going to talk about real estate development in season 10. And most importantly, how do you get your cash to work for you. I am so excited about the new year.
16:29
But I wanted to end 2021 on a high note. I wanted to wish every one of you a very happy holiday very safe, happy and prosperous holiday season. For whatever holiday is important to you and your family. I also wanted to thank you for being a loyal listener this year. We've gotten so much great feedback from our Empire Investment Club, that we are launching in 2022. Please make sure you check that out. To our Growing Empire podcast guests and listeners. To our Empire Capital Fund investors and our real estate brokerage. Our Steel City Realty clients our Empire Property Management clients, Steel Abstract, Empire Property Construction, and all of the businesses that we surround ourselves with. Thank you so much for your loyalty, your dedication, your commitment to us. Thank you for being an avid listener to the Growing Empires podcast. We wish you all the best for a very happy and prosperous new year. Thank you. Thank you. Thank you for all that you have brought to our family and our teams this year. It's been a pleasure to work with you to serve you and to try to bring you the very best of the best real estate investment knowledge. Please, if you have any comments, any feedback, or anything that you would specifically like to see as a topic for 2022 Please reach out to me. My website is JenniferdeJesus.com. If you'd like to know more about the Empire Investment Club that will be launched January 1 2022. It is a free service to you and is going to be a great networking opportunity for our investors, and people that really want to stay on the up and up of real estate investing and how the economy is doing and where the best investments are. Please make sure you check that out. And that is all. I hope you enjoyed everything that we have brought to you in 2021 and until next time, and until the new year, take care.
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For more information about how Jennifer can help you plan, develop and manage a strong real estate investment portfolio, visit growingempires.com