An Asset versus an Income Investment

Dated: May 21 2019

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Real Estate Investing: Income Approach and Value Approach

Income investing
Years ago my brother Bill and I owned a beach house on Fort Myers Beach on Third Street, just down from Moss Marine. Buying it was a story in itself. At that time Bill and I lived next door to each other on Philips Creek – (we originally had purchased 9 acres off route 41 in Fort Myers, Florida and with two other partners developed it into 12 building lots and we each built new houses on a single lot that we kept from the development).

Often on Sunday mornings Bill and I would have coffee and then drive around and look at property. This one Sunday we decided to go look for a boat slip to buy to keep our 23 foot Mako fishing and diving boat. We were touring around boat slips off of San Carlos Boulevard when I spied a slip with a for sale sign on it.

Yes, this was already in the time of cell phones and by 10 AM it was a decent hour to call Marty Wallerstein, the agent. Marty informed me that the slip was actually part of a home sale across the street, but why not buy a house on Fort Myers Beach that came with a deep slip and the house could be rented? He had just such a house for us to see that morning.

Long story cut short, Bill and I had that house under contract within a few days – it was a triplex formally owned by Paul Rosen, developer of Marina Village. We wound up setting up a partnership with two friendsfrom Scotland to buy this house and set up a usage sharing plan and enjoyed that house for years until we sold it about 6 years later.

While owning that home I was accumulating rental properties on a regular basis. Knowing this, one of the local Realtors called me one day to talk to me about buying the home across the canal from this one.

Bill and I had paid $165,000 for the Third Street Triplex in Fort Myers Beach and we were receiving about $21,000 in rents. This agent pointed to the home across the canal and told me that the owner was asking $300,000 for the home.

“What are the rents?” I queried.

Just under $16,000, he replied.

“Well then what makes you think it’s worth $300,000?”

“It has a view of the beach and is on the water,” he replied.

Need less to say I never purchased that property. What the agent failed to realize was that the value of the “view” and “the water” were not reflected in the rents and I was an “income buyer” . I was not interested in the view unless the better view could get me better rents.

Making money in real estate happens in two ways; appreciation –  which is realized upon a sale, and income–  that is generated during ownership.

Income Investing

Investors in income property become familiar with cap rates, internal rates of returns on investments, cost of capital, and the advantages of leverage.   They learn how to maximize returns while minimizing expenses and increasing income. An income investor values his purchase solely on income stream. The view of the water is only important if it will increase his rents. If, on the other hand, there are two opportunities available with the same cost and same return yet one has an advantage of a superior location ( a view, for example), then buy the one the location advantage.

Over the years I have developed an Excel spreadsheet with which I analyze each potential rental property. I will factor in reserves for capital expenditures, maintenance items, allowances for vacancy and credit losses and variances in rents. I allow for depreciation, tax benefits, and interest and insurance costs. I will also estimate appreciation based on increased rents over the expected term of ownership. All this analysis boils down to this: What return can I expect on my investment?

In today’s South West Florida real estate market there are abundant income investment opportunities for the small investor, including single family homes and duplexes; purchases that offer not only cash flow, but a healthy return on investment. These investments often do require active involvement in the property.

An excellent example in a straight income investment is an older apartment building that has stable rents. The value of that apartment building is based solely on its rent income.  Income investors want to know how much cash they receive annually on their investment and are less interested in appreciation – as appreciation is only profitable on the sale or refinance of a property


Appreciation Investing

The most common “Asset Play” herein Florida is land.  Investors buy a vacant building lot. for example, in the hopes that it will appreciate in value. The vacant building lot will cost the investor to own the lot – the longer he owns it the  more it will cost him in taxes, mowing, and lost opportunity cost) so there is NO income, they make their money when they sell. The difference between the price they paid and the net price they sell for is the appreciation.

Balanced investments

To achieve both appreciation as well as income should be the goal.   Income while owning and appreciation to increase the total return (Internal rate of return) upon your exit from the investment


Value Investing
Value investing is a wise approach in today’s market. To me value investing involves determining the underlying value of the property either on a replacement basis or on a stabilized income approach. Value investors buy a property at less than its intrinsic value, then restructure the financing or the intended use, for example, to speed up the return of value. They are long term investors and don’t highly leverage..

Our market is rich with undervalued properties; many of these would also fit will into a contrarian strategy -buying what other investors do not want. Value investing takes more cash, more patience, and more research. Often these properties are more financially stressed than physically stressed. They are often improperly positioned, or struggling under the former owners’ expectations.

Take for example a waterfront development that has failed to go vertical. A value investor may buy this at a much reduced land load per expected vertical improvement, and then restructure the offering from a high rise condo community to a fee simple town house development. Or a value investor may buy a failed condo conversion and
restructure the property senior housing; or buy a hotel, change the flag, and re=position the pricing; or buy an empty bank building and turn it into medical facility.

Sometimes all the investor needs to do is add the element of time. I like the build to rent scenario. Build a new home in a growth area, rent for say five years, and then sell.. ( Market America Development is doing this for clients now – homes build on low cost lots will give you income while the surrounding land ( and yours) appreciates.

For the real estate investor here in Florida Real Estate I see value plays in these areas:

  • Build to rent
  • Buying existing homes or to be built in new communities.
  • attainable housing (Smaller Affordable houses)
  • Industrial Buildings ( See Market America Developments Benchmark project)
  • Flex Space
  • Homes that fit VRBO demands

In addition to the above opportunities, anytime you can buy a single family home well under replacement cost your chances of dong well greatly increase.

Please consult an experienced real estate agent anytime you are looking to invest. If I c

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Gregg Fous

Real estate has been my passion since I took my first Al Lowery class on real estate investing in the 1970’s. I vowed during that class that I would buy one property a year. Over the next five ....

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