Years ago, one of my friends had a side business buying oak furniture in New England and selling it on the West Coast. At the time, people in New England associated oak furniture with brothels and cheap hotels. They were glad to have my friend take it off their hands and pay them actual money for it.
My friend transported the furniture to the West Coast. He cleaned it up and polished it. Then he sold it to people who paid relatively high prices for it because it was trendy at the time. The key word in that last sentence is “relatively.”
Profit is the difference between cost and sales price. Relative value compares the potential profit for different investments.
Suppose you visited a mine and had just enough cash to buy an ounce of gold for 95% of the current price. Now suppose that you discovered you could buy a pound of silver for the same price. The investment is the same; which is the best value?
Checking the current sale price would reveal which element—gold or silver—would bring the most cash. Apartment investing works the same way. You want to invest in the opportunity that will give you the greatest profit when you sell. The question is not which zip code has the highest income residents or highest education. Instead the question is which zip code will be the most profitable for you.
In one zip code a buyer must spend $30K per unit to raise rents 30%. In another zip code just five miles away, an investor can spend $15K per unit for the same result. When you choose the more profitable investment, you build legacy wealth faster.
More bang for the buck is the better value. Buildings that have the right things wrong with them (fixable problems) give you opportunities to create value. The wise investor finds the opportunity with bigger profit potential.
Improving property should improve net income and boost value. The best returns are those that generate relatively higher return on the investment
Adapted from Terry’s book, Building Legacy Wealth.
Terry Moore, CCIM, is the author of Building Legacy Wealth: How to Build Wealth and Live a Life Worth Imitating. Read his “Welcome to My Blog.”