June 2018

In the June Issue

  • Where Traditional Investments are Trending
  • 4 “Safe” Investments That Might be Mislabeled
  • Value-Add, Development & Redevelopment Examples
  • Where to Find the Best Deals & How to Capitalize on Them

Over the past couple of months, we’ve discussed in-depth how to invest in the age of volatility with alternative investment strategies that will diversify your portfolio. This month, we want to explore specific opportunities in real estate that are yielding solid returns in today’s market climate.

Before we look at specific examples within the real estate sector, let’s first understand what is happening with traditional investments…

Traditional Investments and Where They’re Trending

Since the great recession of 2008, the stock market has inched upward and performed surprisingly well in recent years. Yet with this growth, the “bull” is exhausted and has nearly run its course.

The recent round of tax cuts might breathe a second wind into the stock market, a welcome sight for investors, but will likely be the last surge we see in stocks this year. In a similar pattern, bonds are looking riskier with increasing interest rates making them an unlikely option for investors.

4 “Safe” Investments That Might Not be Safe Anymore

For years traditional investments have been the staple for investors, but with the way the market is trending, these investments may not be as “safe” as they were before. Specifically:

1. Mutual funds
Commonly known as the bread and butter of investing, mutual funds provide low risk to investors making them a popular recommendation from financial advisors. However, these funds tend to yield low ROIs with limited upside.

2. Conservative stocks
Financial advisors typically advise building a portfolio of safe investments with one or two aggressive stocks. Yet with a volatile stock market, decent ROI opportunities are becoming more scarce among conservative stocks compared to other alternative investments.

3. Government bonds
Traditionally seen as “safe” investments because they are backed by the U.S. government, these bonds are currently yielding returns lower than 4%. With interest rates and inflation on the rise, this type of investment will have limited upside moving forward.

4. Big REITs (Real Estate Investment Trust)
When financial advisors recommend big REIT’s as an alternative investment, they are factoring in safety first and positive returns second. The reality is big REITs are trading today at low cap rates with limited room to appreciate, so they will have significant downside if interest rates continue to rise. The fundamental strategy of investing in REITs is not wrong, but in today’s market, it may not be the best option.

Each of these four investments have been recommended by various financial advisors for years due to the ‘safety’ of the investments, but their ROI is likely to remain stagnant, at best, in the coming months.

*Side-note: It’s important to remember that financial advisors operate under heavy regulation and within compliance departments, so their financial framework must be built around what is considered ‘safe’.

As the market climate continues to change, opportunities in the traditional sector become less viable while opportunities explode in the alternative investment sector.

Where to Invest Today: Value-Add, Development, & Redevelopment Projects

When it comes to the alternative investment sector, real estate is a solid option for investors with promising returns. While there are plenty of good ROI investments, much of the low-hanging fruit has been picked over in real estate resulting in fewer distressed properties on the market. Investors are now having to get more creative with their strategies to find the “diamonds in the rough”.

So where can you find the best opportunities in real estate today? They lie with value-add, development and redevelopment projects.

These projects are becoming the treasured gems in real estate investing, so we want to give you the strategies to grab the best deals in the market for your portfolio.

Adding Value to Your Investment

Value-add projects have always been seen as “riskier” investments, but what many people don’t know is that these projects can often times be safer than traditional retail projects due to their higher forced appreciation.

*If you remember from our previous newsletter, forced appreciation is a result of actions taken by the owner (i.e. renovations, upgrades, etc.). The best investments have both strong cash flows and high forced appreciation because they can more easily survive the ebbs and flows of the market.

Any repair, renovation, or improvement will add value to a property. A few common examples of upgrades to increase forced appreciation include:

  • Updating Appliances
  • Changing cabinets
  • Repainting
  • Replacing floors
  • Replacing carpets
  • Improving common areas
  • Upgrading facilities with a clubhouse, gym, or laundry service

Of course, these types of renovations require an upfront investment, but the return on these value-add properties is solid. So given the advantages of value-add, development and redevelopment projects, let’s take a deeper look at some specific opportunities within these projects that are proving advantageous in today’s market climate.

Condominiums and Townhouses

Investors are turning to development projects for condominiums and townhouses due to their increasingly high demand and economic advantages. Condos are commonly found in big cities and present the best opportunities in well-zoned areas. Townhoues, on the other hand, are more commonly found in rural areas where land is very valuable.

Infill Housing

Nowadays, developers are shying away from expensive, luxurious housing to more affordable, entry-level or “infill” housing where demand is steadily increasing. For example, a developer will build a $175,000 houses versus a $300,000 house on a valuable piece of land due to affordability. Many expensive, luxurious homes have maxed out their value, so improvements are limited.

With rising interest rates, the housing market for affordable homes is stronger today than high-end homes, so properties with smaller mortgages are in higher demand and attracting more buyers. For this reason, developers are proactively moving in the direction of affordable housing where profitability is greater.

Self-storage and Residential Properties

With the explosion of online retailers like Amazon, traditional “brick and mortar” departments stores are closing their doors at a rapid pace leaving residential space and older malls vacant. This creates phenomenal opportunity for investors because the value of this space is no longer retail or commercial… it lies with residential properties and self-storage units.

These vacant departments stores are usually located in highly valued areas; the location simply cannot support another large retailer which allows investors to come in and convert these structures into profitable residential or self-storage units. The Tempo Opportunity Fund LLC currently invests in several of these type of projects because of their strong returns and positive upside.

Multi-family Units

Lastly, multi-family units continue to be a great value-add option for investors and are commonly found in non-major MSAs. There is nothing wrong with investing in major MSAs or big cities, but they can be very expensive with low cap rates.

When looking to invest in multi-family housing, the best value-add projects will be found in B and C area neighborhoods because these homes are more likely in need of repair compared to A area homes. These projects continue to be an area of growth for investors due to their high forced appreciation.

5 Methods to Find Valuable Real Estate Deals

Now that we know the type of projects generating good ROI, the next step is knowing how to find these opportunities. Let’s look at 5 methods that will help you find the right deals for your portfolio.

1. Old-fashioned networking
The first and most important method is to use your network. Contact people you know or maybe people who are friends of friends. Meet people who are facing specific circumstances like retirement, death, distress, etc. because they might be needing to sell a property fast.

Another valuable form of networking is finding the owners of specific properties you’re interested in. By going straight to the source, you can find goldmine deals that are not listed on the MLS. Don’t hesitate to knock on management doors to get an introduction with an owner.

2. Pick a Target
Look for specific opportunities within a given area like apartment complexes that could use some renovations and/or additions. Make sure to find properties that are well-positioned in a market.

3. Direct Mail, Social Media, Outbound/ Inbound calling
These three traditional marketing methods will help you increase your exposure and introduce you to a colder target market. Many investors find lots of success with these marketing methods, but it’s important to pair them with your personal networking strategies as well.

4. Build relationships with commercial & multifamily brokers
Making connections with people in the investment world is rarely a bad decision. Because the trend is moving toward commercial and multi-family projects, it’s important to make connections with these brokers, so you will be at the top of their list when opportunities arise.

5. Auctions
Like we mentioned before, there are fewer distressed properties on the market, but if you know where to find them, you can score a quality deal. Commercial auctions are a good place to start, but you will need to have cash readily available for bidding. Small deal spaces typically present better opportunities because big REITs don’t invest in this space. We will normally bid in the $2M- $3M range because it’s too much money for small players but too small for big players.

It’s important to understand that finding valuable deals is not easy. In every 500-1,000 deal analysis’, there will be around 20-30 site visits. From those 20-30 site visits, there will be 10-15 letters of intent. From the LOIs, there may be 2-3 closings. Despite the low closing rate, the deals you close are typically high-quality.

*Investor Tip: The strongest cash flow opportunities are found in the Midwest and Southeast regions. These areas are a good place to start your marketing efforts.

Concluding Thoughts

Before venturing into the value-add space, make sure you have a well-organized management and operating team to take a property through its life cycle and the capital to invest in the project. You want to be ready to invest when a valuable deal comes your way.

If you would rather invest passively and not worry about the research needed behind finding deals, consider investing in a fund like the Tempo Opportunity Fund LLC. We stay ahead of the game and are already investing and participating in value-add, development, and redevelopment projects.

As an investor, you’ll completely bypass any legwork, paperwork, and hard work of finding and closing real estate deals when investing in a fund, and you instantly diversify your portfolio and participate in solid, high-yielding projects. If you want to learn from some of the best in the real estate sector, visit Big Mike’s Podcast page: www.BigMikeFund.com.

If you’d like to talk to us more about our experience, expertise, or the Tempo Opportunity Fund LLC, please contact us and we’ll be happy to discuss them with you.

Thanks for reading,

Mike Zlotnik
CEO, TF Management Group LLC

This newsletter and its contents are not an attempt to sell securities, nor to sell anything at all, nor provide legal, nor tax accounting, nor any other advice. The presenter is a private lending and real estate fund management business, and the information represented herein are purely for educational purposes and represents the opinions of the presented. Prior to making any investment or legal decision you should seek professional opinions from a licensed attorney, and a financial advisor.

TF Management Group LLC (TFMG) is an investment fund management company that specializes in both short-term debt financing for real estate “fix and flip” projects, and long-term “value-add” equity deals.