Business Model

Acquisition Strategy #1

Assets With Poor Operational Metrics In Need of Improved Property Management

As “Owner-Operators”, we only manage properties that we also own. We have found many great deals with “hands-off” passive owners that use third party management companies. In our experience, the people supervising third party managed assets are far less motivated than we are, as owners that are supervising our own properties daily. We depend upon the asset cash flow to feed our family, and that is why we are so passionate about operations.

One key to our success in property management is the way that we approach employee compensation. We compensate our team with bonuses for achieving specific goals. For example, if a property reaches an agreed upon collections target and maintains that new high for at least 90 days, we have paid $20,000 in bonuses to the team. That is enough money to significantly change their daily behavior while in pursuit of that bonus target. As soon as that target is met, we create a new bonus target and start pushing toward it.

Some examples of operational metrics we often are able to substantially improve, and thereby increase the asset’s value are below:

• Occupancy
• Resident Turnover Ratio
• Delinquency and Bad Debt
• Crime Statistics
• Makeready Turn Time

Acquisition Strategy #2

Assets With Significant Deferred Maintenance Needing Renovation

We seek out properties that have accumulated significant deferred maintenance that has resulted in the erosion of short-term market value. While it is true that many properties in need of renovation sell at a discount because buyers and their lenders are often wary of taking on a major rehab, these properties also sell at a discount because their NOI and implied value has dipped substantially.

In our experience, the costs of correcting the deferred maintenance are dramatically lower than the discount available because of that poor property condition. Thus, it is possible to create a major capital gain by making the investment of time and money to rehab these properties.

In financial and appraisal terms, the deferred maintenance leads to ongoing repairs resulting in lowered revenues and higher operational expenses. When we transfer the operational expenses on the income statement to a one-time capital expenditure on the balance sheet, the resulting increase in NOI and implied value is profound. At a capitalization rate of five percent, for example, each dollar of increased NOI increases asset value by twenty dollars!

Some examples of value-add renovation line items we typically focus on are below:

• Interior upgrades such as open kitchens, granite counters, plank flooring, quality fixtures, and higher end appliances
• Amenities like pools, playgrounds, dog parks, splash pads, package rooms, fitness centers, etc.
• Leasing offices
• HVAC equipment
• Roofing systems
• Paint and woodwork
• Stairwells, railings, and fencing
• Parking lots and sidewalks
• Plumbing and boilers