Street Smart Success

In the last several years, industrial Real Estate has become a highly visible asset class, mostly because of ecommerce. One growing subset of this category is Industrial Outdoor Storage. It’s a great asset class because there’s very low capital expenditure or management involved. It’s mostly land with a small, sparsely furnished industrial building, and sometimes no building at all. As a result, it can be extremely lucrative. Matt McLennan, Executive Vice President of Kidder Matthews in Seattle, help clients buy, lease, and develop Industrial Outdoor Storage facilities. Matt has also invested in these assets individually. 

There can be outsized returns in out-of-favor asset classes when there are still strong underlying fundamentals.  Office, in particular, can still be lucrative. Matt Drouin, Partner at Oak Grove Development, has acquired great legacy office buildings in downtown Rochester that are generating great cash flow. Matt also invests in multifamily, retail, and industrial in Rochester. Tight geographic focus and intimate market knowledge eliminates a lot of risk and results in great returns. Matt only does fixed rate debt and buys for long-term holds.

In the alternative investing space, there are numerous ways to build long-term wealth. Many of these opportunities involve direct investment in Real Estate, but there are other investments that the same or even better returns. Dave Zook, Founder and CEO of The Real Asset Investors, invests in alternative asset classes including ATM machines, Oil and Gas production, Car Washes and Self-Storage facilities. Dave creates partnerships with proven operators who specialize in respective asset classes and has a very strong track record generating outsized returns for investors over a long period of time.  

As we’ve emerged from the pandemic, Americans are now travelling almost as much as they were back in 2109. In certain markets, the hospitality industry is doing as well, if not better than ever, but there are still great opportunities to invest in hotels. Paul Hassebroek, Principal of Six Four Asset management, has been successfully operating hotels in Iowa and Wisconsin and will be raising a new fund to acquire more value-add opportunities within the Marriott chain. Paul will increase profits by implementing corporate sales strategies and improving operational efficiencies. 

A great sector of Real Estate investing that has a low barrier to entry is land flipping. Land flipping requires very little start-up money, and the profits can be incredibly lucrative with very little downside. Mike Deaton, a successful land investor, generates as much passive income from land investing as he and his wife made combined in high corporate salaries. Buying and selling land is easier than selling a house, apartments, or other commercial buildings because it’s just land with no physical structure. After becoming very successful, Mike is now coaching others on how to replicate his success. 

A well refined market niche for real estate entrepreneurs can deliver outsized returns, but it’s easier said than done. It takes a lot to discover a niche in a crowded marketplace, and it requires discipline to stick with it without getting distracted by other shiny objects. Axel Ragnarsson, founder of Aligned Real Estate Partners, buys 10–50-unit value-add apartment buildings in Southern New Hampshire directly from sellers. Axel’s completely vertically integrated and knows the market incredibly well. Southern New Hampshire is a supply constrained, stable market with population and rent growth as residents are moving there from more expensive markets in the Northeast.

Over the last five years, overly exuberant investors vastly overpaid for multifamily properties. Instead of basing their pricing on in-place property performance, they based their pricing on overly aggressive proformas. In many cases, these proformas didn’t materialize because of increased renovation costs and declining rents. Because of these factors plus increased borrowing costs, we’re starting to see distress in the marketplace. Bill Hamm, Co-founder of Broadwell Property Group, was smart enough to sell off his portfolio a couple years ago when the market was incredibly frothy. Bill is now looking to jump back into the market to acquire B Class core properties in great locations in major metro markets with 5 – 7 year holds.

Although there can be gains from physical improvements to a property, the most expedient value-add occurs when you buy well-maintained properties for less than they’re worth. Ben Kogut, founder of Rooster Equity, buys single tenant retail properties, office buildings, shopping centers, and medical office properties from motivated sellers at prices below market. These properties have few improvement needs and are generating impressive cash flow at the onset so investors get solid distributions right away.

With construction costs having increased for value-add properties, and better deals coming online for newer properties, acquiring older properties may make less sense than a few years ago. Older properties also have a lot of maintenance costs and higher unit turn costs. As prices continue to come down for newer properties, these deals pose less risk and greater reward. Mark Weinstein, President of MJW Investments, has acquired over $1,5 Billion of apartments, student housing, commercial buildings, industrial, and self-storage facilities over the last several decades.  More recently, Mark has focused on Multifamily in growing markets that have been less impacted by oversupply.

In the past few months, great deals have materialized across asset classes as the buyer pool has shrunk and sources of capital have dried up. As a result, more deals are generating attractive in-place cash flow.  Cash-on-cash upon close is more important than IRR and Equity Multiple because cash flow is immediate and reduces risk.  IRR and Equity Multiple are speculative and don’t always materialize.  Irwin Boris, Head of Investments at Heritage Capital Group, has decades of experience across most asset classes. Heritage stopped acquiring multifamily five years ago and has been acquiring warehouses and flex industrial and generating in-place cash-on-cash of 9% or higher.