In an earlier post, two types of appreciation, we discussed market-driven appreciation, something that cannot be controlled, and revenue driven appreciation. Market forces drive one and good management drives the other. Unfortunately, some investors are betting on market forces for their returns and placing less focus on the ability to fundamentally grow value through optimizing management. What do I mean? Here is an example:

Market-Driven Growth

Everyone knows the demand for real assets is insane. This is driving lots of competition amongst investors for the same apartment communities (which makes it a great time to be a seller!). Prices are flying high and many investors at the time of acquisition are betting that the market will reward them with a lower cap rate (which means higher price for same income stream) in the future. Unfortunately, these assumptions are hopes and any investment based on hopes are not sound.

Management-Driven Growth

On the contrary, when an investment firm identifies an asset that is undervalued based on current net operating income then there is a margin of safety, as buffet would call it. There is opportunity to raise income and / or lower expenses and force equity. As you can see, these situations are controllable.

Of course, finding great deals like this are harder in this competitive market but they are out there. Sticking to the fundamentals by focusing on improving operations is the best way to execute the business plan. Of course, market driven appreciation is the icing on the cake!

Safe Investing!

RRII