Rethinking What Real Estate Investing Is All About

Traditional real estate investors may miss one of the more exciting opportunities available to us all in today's market.

Taking the view–what I will call "the traditional view"–of real estate investing as simply getting control of income-producing property and enjoying the cash flow is to miss the major opportunity available to all who choose to invest today.

The Urban Rehabber Program is at first glance all about the real estate investing ‘business’. But, truth be told, we like to "salt' that interest with tools and attitudes often associated with the  real estate development business.
The term "real estate developer" is not to be taken casually. For those adventuresome individuals who choose to ‘buy, fix, and sell’ real estate indeed satisfy the traditional definition of Real Estate Developer. And real estate developers simply put a more dynamic spin on traditional real estate investing. We might call them "activist investors", intent on fast-tracking their way to portfolio building and real estate wealth.

The difference between real estate investors and real estate developers

There is a distinct difference between real estate investors and real estate developers. For starters, the real estate developer makes an intervention in the nature of the property. You will recognize the process. Farm acreage may be ‘improved’ with rezoning and subdivision, and the resulting smaller parcels resold or developed as residential or commercial building sites. In a very real sense, the developer has changed the nature of the entity: The former agricultural land has been segmented, divided up into multiple smaller lots; the use of the property has been changed, adapted to meet new market demands. In doing this, value is added, profits earned and wealth increased.

Other examples include the ‘conversion’ of multifamily rental apartment buildings to condominium ownership. The conversion of functionally obsolete industrial loft buildings to residential or commercial use is an adaptive reuse of properties that may be said to have outlived their original use. Curing functional obsolescence and adaptive reuse changes, sometimes transforms, the nature of the entity. Created something different and, presumably, better suited to changing market demands.

The unifying principle is that in some substantive and perhaps creative fashion, the real estate developer has stepped in–intervened, if you will–to change or in some manner enhance the nature of the property (the “entity”).

Fixing what’s broke…

Rehabbers do this when we acquire a distressed or functionally obsolete building and enhance it through improvements to the physical condition of the property. In today’s jargon we “rehab” (or rehabilitate) the property. Stripped to the essentials, this means “fixing what’s broke” and may or may not include “modernization.”

To replace the roof, electrical or plumbing systems is to restore function. Adding second baths, “open” kitchens, two or three-car garages, or a back yard hospitality deck, is to move beyond the scope of rehab and, in fact, constitutes “remodeling” or “modernization.”

The decision whether we rehab or remodel (modernize) is generally dictated by local market conditions. It’s all about price point–what the Market will pay for our arguably “improved” housing product. It the community is undergoing “gentrification” and consequently rising property values, then the marketplace will not only support but in fact demand modernization. On the other hand, if the market is simply stable, it may be more prudent to confine one’s work to restoring value (fixing what’s ‘broke’) without the expectation of selling for more than neighboring properties of comparable condition.

Entrepreneurship makes the difference

The decisions we make in selecting and executing a successful real estate venture are partly intuitive (following your gut) and partly quantitative–“How do the numbers look?” But in the end, with all the facts in hand, the decision to go forward will be entrepreneurial.

The successful entrepreneur, whatever his or her chosen field, collects all the relevant information and, based on that understanding, perceives the risk to be moderate, to be manageable. The successful entrepreneur is a Moderate Risk Taker, not a gambler or speculator. He or she understands there may be setbacks – things never go precisely as planned – and has one or more contingency plans (or, at least a Plan B) which will serve to contain or limit the risks involved.

The distinctions discussed here are an important first step in learning to identify both the possibilities and the pitfalls that await even those best prepared. In spite of popular folklore abroad today–of fast and easy money to be made–the real estate business is as demanding as it is rewarding. There are methods, analytical tools, industry protocols, and more than a few Old Hands’ Tips to be learned, that together will lend direction and enhance your success.

Urban Rehabber “Fast Track” System

I have often been asked whether there is a “system” that might speed one’s progress as a real estate investor – particularly when starting out with little experience and limited capital. This is by no means a naive question. Many real estate fortunes were founded on such limited means. The Horatio Algers of the real estate business.

The question deserves a thoughtful answer because, indeed, real estate offers an uniquely accessible avenue to wealth. And there is a strategy which, when pursued with diligence, will achieve the desired outcome. For lack of a better name, I call this strategy a “Fast Track System” for achieving wealth in real estate. There are seven Action Steps to the Fast Track System –

Define your Goals & Objectives within the context of your personal Value System. Goals and Objectives arbitrarily arrived at, without consideration of who you are as a person and your role in society, will lack substance and staying power.
Determine your personal and financial readiness. What are your financial obligations; and what are your financial resources?
Answer the question: “Why Real Estate.” There are other paths we might follow for which we are better suited.
Identify your market, the niche you will work in–at least initially; what will be your role in that market niche? (The “fast track” answer: Distressed real estate.)
Prepare a formal, written Business Plan. Such a plan will require you to research and think through your business model. Importantly, your Business Plan will place each project within the context of a long term program to meet your objectives.
Take action! Buy, fix as necessary, then sell or “hold” as your plan dictates.
Maximize the use of your capital by “Rolling Your Equity.” In this way, your Capital will be used again and again to build your Portfolio. With the added value of your energy and expertise, each property added to your portfolio will be “perfectly leveraged:” You will own the asset, your Net Worth will have increased, and your Working Capital will be back in your pocket, available for the next investment opportunity. In the end, your acquired Wealth will be vested in a conservatively financed portfolio of income earning investment properties.

Entrepreneurship, leavened with the vision and discipline of the traditional investor, combine as an Entrepreneurial Investor building wealth on the Fast Track. Yes, it is a Secret Sauce…

– Philip Elmes