During a downturn in the real estate market in 2012, Blackstone Property Group in New York City successfully applied the core principles of value investing to single-family rentals and multifamily properties for massive returns. By purchasing assets at historically low interest rates, the group was able to build equity in secondary markets outside of NYC while enjoying the benefits of cash flow.
This is just one example of real estate value investing. If you’re interested in investing in undervalued real estate, now is a great time to do so. In this article, we’ll discuss what value investing is and how you can use it to increase your return on assets faster.
What Is Value Investing?
Value investing is a strategy that involves finding stocks that appear to be undervalued and buying them. In the stock market, there are many stocks that are valued under what they should be based on measurements of a company’s book value, price-to-earnings, and/or free cash flow. Value investors are some of the more famous names in the financial world. People like Warren Buffett, Benjamin Graham, Charlie Munger, and Seth Klarman are all highly successful value investors.
It may be helpful to compare value investing to buying a brand-name item on sale. Let’s say you wanted a vintage pair of Air Jordans, and you knew that they were valued at $800. If you saw a vendor listing them for $650, you would obviously want to purchase them at that rate because you know you’d be getting a deal.
What Is Real Estate Value Investing?
Value investing in commercial real estate follows a similar line of thought. Real estate value investors usually look for properties that are below value and located in secondary markets.
Let’s say Manhattan, New York City is a primary market, and Paterson, New Jersey is a secondary market. If you’re a real estate investor looking to purchase commercial real estate, you may look at comparable buildings in both cities and find that you can purchase a very similar asset at a much lower price in Paterson than you can in Manhattan.
Conversely, if you were not focused on value investing, you might buy the property in New York City, knowing the demand is greater there, and you could likely make more money faster off of tenants. The cash flow in New York City is likely higher which is great for short-term investments in real estate. However, assets in high-demand real estate markets may also have higher operating expenses and, of course, a higher purchase price.
Because the initial purchase would be so much more than the building in Paterson, NJ, you might not actually be making a wise long-term real estate investment decision, especially as smaller cities in New Jersey become more attractive as satellite locations for remote workers near New York City. As smaller cities grow over time, so will your equity and the value of your real estate investment.
How to Use Value Investing in Real Estate
Here are a few methods to try for your next real estate investment.
- Buy in secondary markets – As in the example above, you can buy real estate in secondary markets that might be missed by other investors. This strategy is a great long-term decision as your asset will appreciate as populations grow and expand.
- Look for superficial damage – Leverage your knowledge of how appraisals work to find assets with only superficial damage. If you know a thing or two about building maintenance and repair, you could spot easy fixes that cause other real estate investors to walk away.
- Avoid the MLS; network instead – Some of the best real estate deals aren’t listed on websites like LoopNet. There are many reasons a property owner might be willing to sell their building below its actual value. Maybe they are retiring and just want it off their hands. Perhaps they dislike dealing with bidding wars. Perhaps the owner doesn’t even know they still own it, as is the case with zombie foreclosures, and would be happy to be relieved of the trouble and debt. Always keep your ears open and let other investors know you’re on the hunt.
Real Estate Value Investing Can Be Lucrative
Value investors in commercial real estate and in the broader real estate investing world take their time to find stable investments that are underpriced, and likely to overperform in the long term.
Use your network and knowledge to identify undervalued buildings. The profit will be worth it.