Proactive Investment Strategies
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“Proactive Investment Strategies vs. Passive Investment Strategies for the Advanced Wealth Builder”
As I write this, the stock market is gyrating up and down several hundred points from day to day and sometimes during a single day. On the financial programs on TV this week, Wilbur Ross and Warren Buffett both stated during interviews that they had purchased stock in companies that they had been waiting for the price to drop to “their price.”
This made me think of Be My Guest by and about Conrad Hilton. This little book used to be in every room in every Hilton Hotel and you were encouraged to take it home. I read the book on a trip many years ago and took it home, and I read it again and then again. One of the major contributing factors to Hilton’s success was that he identified which hotel markets and which hotels he wanted. Then he did his homework to discern their real value to him, what could be executed to make them more profitable—then he patiently waited and watched until he could buy them at a correct price for him. History tells us that this formula worked very well for Hilton, just as it has for our Members who have approached their wealth building in the same manner.
A few highly successful real estate investor/operators do proactively identify properties they want before they go on the market. Please note the descriptor “investor/operators.” In my experience, I have not even read about or heard of a “passive” investor (meaning a non-involved owner) who proactively identifies properties in advance of those properties becoming available, which fit the investor’s goals, objectives, and benefit criteria in some manner.
In relative terms, proactive investor/operators consistently demonstrate higher returns and lower risk factors in their ownership. One investor/operator I know proactively acquires properties in his market segment at bargain prices with known potential for increasing income and property value, often before they ever are on the open market. Within a few years, with a relatively low level of capital investment, this owner sells to one of the passive large portfolio investors at a profit of sometimes a multiple of his investment.
The market is experiencing changing demographics of the Millennial generation transitioning to economic and political dominance. Government regulation has exploded and real estate investors are now being impacted by the growing power of the Consumer Finance Protection Bureau (Dodd-Frank) overseeing and regulating all real estate transactions/financing. Considering the macro political and financial cycles that will be played out over the next few years, there is strong potential for great geographic differences in the performance, value, and marketability of all categories of real estate investment.
It certainly appears that we are moving back to “local and regional” market differences across the United States. For that reason, the diligence we used over the past 2 or 3 decades might not be applicable going forward or, at minimum, needs to be revisited for properties currently owned and markets and properties being considered.
One of the hallmarks of the S.E.C. thought process is to employ “PROACTIVE” thinking, planning, and diligence. Going forward from 2015, the active wealth builder will do well to focus on and stick to the investment arenas one knows best and carries the greatest expertise in.
As an example, an experienced and knowledgeable owner of office properties might be considering whether to keep the properties they already own. Many investors overlook a regular check and “go forward” diligence on the property they already own. Even if that property is doing well and providing a generous supply of the benefits wanted from ownership, is there anything out there potentially developing or happening in the market area of owned property that might have either a negative or positive impact on your ownership? Maybe there are competing properties about to be constructed. Possibly a major employer in the area is in a merger, which might mean an expansion of the local facility or the local facility will be downsized or closed. Are there government regulations or rules being instituted that will have a direct or indirect impact on owned property? The point is that owned properties should still be researched and analyzed periodically to make sure you still want to buy (continue to own) for what they are worth now with your go forward forecast.
What about your next property or properties? Do you know exactly what properties you want and the benefits you want from them?
Knowing what you want happens at two levels. Level one is the “category, location, and criteria” level. This level of thinking is more than just the “factoids” of property, location, and market profile (i.e., the property numbers in the context of the market area.) As important as the “factoids” themselves is the “WHY” of each factoid characteristic in the profile of the properties “WANTED.” This presentation doesn’t have the space to go into detail on all the questions to consider for each criteria factor in your desired property profile.
The second level of knowing what property(s) you desire is the one most often IGNORED. What specific properties that fit your “taker” profile do you want when the opportunity arises to acquire them at a price and terms that make them profitable to YOU? What are those prices/terms? This is a big, long-term profit factor for people like Warren Buffett, Wilber Ross, and Conrad Hilton. They identified the investments they wanted long before they ever came on the market at the price/terms they knew would be profitable for them. Besides being ready when the acquisition opportunity presented itself, they already knew what they were going to do to make the profit they expected from their acquisition. After more than 4 decades in commercial/investment real estate, I have experience with fewer than 10 investors who knew what properties they wanted, tracked those properties until they came available, and, in some cases, pro-actively made unsolicited offers on properties that were clearly not on the market. They even picked out the best competitive properties to what they already owned to grow their
market share and control their competition. Such acquisitions were often very profitable because the investor was able to leverage their existing management, maintenance, and marketing programs, which meant they could make more profit from the same income level than the current owner. Most importantly, these advantages were NOT a guess—they simply watched the property and studied the operations of the existing owners. In today’s Internet and digital world, it is possible to know a tremendous amount about the condition, operation, income/expenses, and market position of a property in most property categories in most locations without ever setting foot on the property or talking to the owners, managers, or employees. When Conrad Hilton took over the money-losing Waldorf-Astoria Hotel, he knew exactly what he was going to do and how he was going to do it to make his grand hotel profitable.
Why more investors do not take this action is certainly a good question. The probable answer is that this action, however much it might increase their profitability and net worth while reducing risk, requires time, energy, effort, and sometimes cost. The dreaded four-letter word—WORK. It is my contention that even if an investor expends some upfront cash expenses to hire a professional to accomplish the “know what you want” strategy, the long-term profit and reduced risk will be mightily rewarded.
Whether you are a two-family rental owner or an apartment, office, or shopping center mogul, it makes good sense to be ready to move the moment that a highly desired and potentially profitable property you already know you want looks like it might be available. The work of due diligence for the properties you identify for which you are a “taker” at your highest acceptable price/terms is the easy part. In my experience, the most difficult part is to DECIDE to think through your investment criteria and to thoroughly develop your specific criteria for your acquisition, ownership, and disposition criteria.
The next—and most difficult—part is persisting over some period of time in identifying the ownership benefits you need/want from your ownership and thinking through each of your selection criteria to be sure it fits your need/want benefits. It is often useful to explore ideas and market understanding with colleagues or other advisors. It is beneficial, and sometimes necessary, to find a COUNSELOR to help think through the process. A “Counselor” is different from a “consultant” or a “broker.” A Counselor’s sole purpose is to guide the owner/investor to a clear and educated understanding of their property or desired property and the ownership benefits. Without this clear and educated understanding, a great many costly mistakes are made in real estate. Experienced, hourly, fee-based Counselors are somewhat difficult to find, but they are available at a cost that is insignificant when compared to the costly mistakes owners make in acquiring the wrong property for them or disposing of a property they should keep.
These thoughts are presented for the readers to CONSIDER. None of this is gospel or written on sacred tablets. Everyone should put it in their “grey-matter” computer and filter it with common sense and all the factual knowledge they can obtain. Just a tiny bit of effort can result in better decisions and produce much greater ownership benefits with less risk.
Special thanks to Kim Colin, S.E.C., who provided input and encouragement during the thought process in developing this expansive topic into a concise article.
