We’ve all seen how the rising tide turned amateurs into real estate gurus this past decade. But as Warren Buffett famously said: “Someday the tide will go out. Then we’ll see who’s swimming naked.”
Well, someday has arrived.
Are you swimming naked in a receding tide? Or shivering on the beach in a winter coat? A quick scan of real estate investing news shows a lot of bare skin, as well as reports of many investors retreating to the beach.
But you don’t need to retreat. Sound investments with strong profit potential are available right now—if you know where to look. I’ll demonstrate that in a moment.
And many real estate investors are experiencing suspended distributions, capital calls, and even total losses. (This punctuates BiggerPockets’ mission to educate investors on due diligence and diversification, but that’s a topic for another day).
You, Too, Can Invest Like Buffett
If you and I could have invested with Warren Buffett decades ago, our Berkshire Hathaway stock could have lost over 99% of its value and still trounced the S&P 500 in the same period. We don’t have a time machine, so we can’t invest with Buffett in 1965. But we can look for opportunities to invest like Buffett—especially in turbulent times like these.
Some of Buffett’s most profitable deals were done over dinner, with a handshake and a few notes on a napkin. One happened on a 15-minute call. (You’re about to see why this matters.)
These acquisitions didn’t happen in a vacuum. They happened because of relationships built on the basis of time and trust. These are commodities in short supply these days.
All these deals had gaping holes that caused them to be undervalued at the time of acquisition, resulting in significant wealth-creating potential for Buffett and his investors.
You may think opportunities like this are out of reach for you, especially in this low tide. But we can assure you that’s not true.
A Case Study
Part of our mission at BiggerPockets is to educate you to invest in deals most investors only dream of. Like this surprising one, for example:
“The Johnsons” operated a mobile home park they built it in the early 1980s. Though it was family-run, it was among the region’s largest parks. And their popular county was the fastest-growing in the state.
But the aging patriarch faced health challenges. And the kids didn’t want to run it. The family was ready to exit.
As you can imagine, interest in this large park was quite strong. Institutional investors and fast-talking brokers circled. Large numbers were discussed. Lofty promises were made.
But one mobile home park operator (Mark) was different. Mark loves people. And he knows how to make profitable investments.
Mark got to know the family and genuinely empathized with their situation. He understood their desire to care for the tenants the family had cared for over decades.
Mark had dinner with the family at their home. He sent a gift basket during the patriarch’s hospital stay. Mark listened to their vision of how they would improve and expand the park if they could. He also checked in on individual family members during the whole process.
And Mark submitted an offer to buy the park. But it wasn’t the highest offer. So how did he acquire it?
Like many families, the Johnsons were as concerned about their legacy as they were about their bank account. They wanted to know the buyer cared about them and their tenants. They accepted Mark’s offer because they trusted him and believed in his vision for the park’s future.
Note: The investment described above is closed and no longer accepting new capital.
So, How Do Investors Benefit?
Like most mom-and-pop mobile home parks, there were dozens of empty lots. It’s capital- and management-intensive to acquire and set up new homes on these lots, and this is particularly tough because lot rents were far below market rates.
There was also vacant land adjacent to the park. But, the county approval process to expand a park is not for the faint of heart. In fact, it’s almost unheard of these days.
Mark undertook a number of initiatives to improve the asset and the investor’s returns. First, his experienced team tackled much-needed deferred maintenance to enhance the park. Then, they made improvements to roads, curb appeal, and other infrastructure. Over the following year, they raised lagging lot rents up to about 10% below the competitive rate.
The high demand for affordable housing in this growing county motivated them to acquire and set up homes that would be sold to new residents. Residents financed homes through arrangements Mark’s team had with manufactured housing lenders.
The strong demand for housing prompted Mark to apply to expand the park by 70 lots. The county’s need for affordable housing prompted them to swiftly approve the request. The park will have 438 lots when complete.
A third-party appraiser estimated the team’s initial actions resulted in an increased park value of $6 million in the first year. Mark believes the value will be up at least $10 million after executing the full expansion in the years to come.
Cash flow to investors is currently strong, and with a 4.9%, 10-year fixed (five-year, interest-only) loan at about 50% LTV, this could be a safe investment (there are no guarantees in this world).
The acquisition process, the value-add proposition, and the operator’s execution of this investment seems quite Buffett-esque to me.
How about you? How are you finding deals in this challenging economy? Or are you waiting it out on the sidelines?
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Mr. Moore is a partner of The Wellings Real Estate Income Fund, the investment advisor of the Wellings Real Estate Income Fund (WREIF), which is available to accredited investors. Investors should consider the investment objectives, risks, charges, and expenses before investing. For a Private Placement Memorandum (“PPM”) with this and other information about the Wellings Real Estate Income Fund, please visit wellingscapital.com, call 800-844-2188, or email [email protected]. Read the PPM carefully before investing. Past performance is no guarantee of future results. The information contained in this communication is for information purposes, does not constitute a recommendation, and should not be regarded as an offer to sell or a solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be in violation of any local laws. All investing involves the risk of loss, including a loss of principal. We do not provide tax, accounting, or legal advice, and all investors are advised to consult with their tax, accounting, or legal advisers before investing. Mr. Moore and Wellings Capital are not affiliated with BiggerPockets.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
