Investment Strategy (Part 1)

I’ve been working on my business plan the past couple of days, and it has required me to take all the information I’ve been gathering and considering over the past several months and finally decide what specific real estate strategies I’m going to pursue. Once I decided on multi-unit properties (apartments) as my preferred property type, it was time to start considering the actual investment strategies that would fit my skills, interests, and goals.

I actually came up with two specific investing strategies I plan to employ — Fundamental Investments and Value Play Investments. These two investment strategies complement each other very well, and between the two, my goal is to be able to generate short-term capital gains (via Value Play Investments) that will allow me to buy long-term assets that will provide enough cash flow to retire in style (via Fundamental Investments).

The rest of this post and the following post is taken directly from the “Investment Strategy” section of my Business Plan, and lays out the high-level strategy I will employ for my real estate investments. Below is the section of my Business Plan where I discuss my strategy for “Fundamental Investments” and my next post will discuss my strategy behind “Value Play Investments.”

LISH PROPERTIES BUSINESS PLAN

Investment Strategy

The company recognizes that there are many strategies that lead to real estate investing success. As such, we will use a variety of investing strategies, as appropriate, to achieve a variety of end-results. The company will first focus its efforts on two strategic investment strategies – Fundamental Investments and Value Play Investments – as defined below.

Long-Term “Fundamental” Investments

“Fundamental” investments will serve as the cornerstone of the company’s exit strategy. By purchasing properties with the ability to generate consistently strong cash flow over the long-term, the company can ultimately allow its investors to retire, while continuing to receive passive income into perpetuity.

Properties considered as fundamental investments will meet a strict set of minimum financial and cash flow criteria. Additionally, properties considered for fundamental investment will ideally be located in areas where long-term growth (population, job, income, etc) is expected to thrive.

Because fundamental investments are expected to be held long-term, exit strategies for these types of investments aren’t as important as for other types of investments. That said, there are a number of strategies that the company will follow when evaluating and carrying-out fundamental investment opportunities.

Among them are the following:

Demographic / Economic Trend Analysis
The company understands that local and regional trends, as well as economic and demographic changes contribute to the long-term value (or lack therefore) of an investment property. For example, properties in areas that are experiencing population and job growth are more likely to generate capital appreciation than properties in areas where unemployment is rising and population is declining. Using information gathered from federal agencies as well as local government/chamber-of-commerce sources to help understand economic and demographic trends in potential investment locations, we will be able to make informed investment decisions.

Asset Accrual
While the company will opportunistically leverage short-term “value plays” when they present themselves (see below), it will chiefly focus on a buy-and-hold strategy to generate long-term asset accrual. Long-term asset accrual serves several purposes for the company, including: wealth generation through market appreciation of the properties, tax benefits associated with long-term capital gains, and the free-and-clear ownership of assets paid by occupants of the properties.

Cash Flow
Through market-driven rental increases and the ultimate pay-off of property loans, it is expected that the cash flow generated by the company’s holdings will be substantial, and will allow investors recurring passive income for as long as the properties are held. Because only positive cash flow properties will be considered as investment vehicles, it is expected that cash flow will be generated from the outset, and will be returned to investors based on pre-defined payment schedules.

Trading Up for Value
In real estate, it is often the case that “bigger is better.” More specifically, properties with more units tend to benefit from economies of scale and, in general, generate larger cash-on-cash returns than properties with fewer units. To leverage the higher returns of bigger – and therefore more expensive – properties, the company will use 1031 exchanges whenever reasonable to acquire larger properties with the equity and appreciation of previously owned smaller properties. Through the use of 1031 exchanges, the company can defer capital gains and use accrued value to “trade up” and increase returns for the company and its investors.

Diversification
The company will use a strategy of property diversification to reduce long-term risk associated with investing in a single asset class (real estate). While in the short-term the company will focus relatively common investments such as duplexes and 4-plexes, the long-term strategy of the company will be to diversity into less common – but more lucrative and still low-risk – investments such as apartment buildings/complexes and commercial real estate vehicles.

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