Blog | Real Estate

Finding Hidden Profits Through the Upside

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Opening your eyes to the investment possibilities around you

Every investor wants to make a big return. The questions become, “What separates average investments from great ones? Where can hidden profits be found?” The answer is in the upside.

Upside, music to an investor’s ears

What is upside? It’s what you can do to increase the value of an asset. Upside is what makes a prospective investment especially attractive to an investor. Upside is the opportunity to significantly increase the income or the value of an investment in the future. It’s in the upside where the greatest profits and returns are made.

Examples of upside

The upside of a poorly managed apartment building could be to increase revenue by replacing non-paying tenants with good tenants.

The upside potential of a pharmaceutical company’s stock would be the announcement of a medical breakthrough.

The upside of gold would be that the government continues to print money.

Finding a solidly performing investment is great, but finding an investment where you see the opportunity to increase value with an outstanding upside is what gets the adrenalin flowing.

Where to find upside

The upside is often found in problems. Think about the great entrepreneurs. Most entrepreneurs begin their business because they’ve come across a problem in their lives and thought of a solution.

Mothers are a great example of this. Just recently I heard about the mother of a two-year-old boy. She wanted to give him water out of the small water bottles you buy in the store, but he had trouble maneuvering the bottle. He always ended up spilling the water all over his shirt and pants. This woman invented a “sippy cup-like” top that screws onto the top of water bottles. At first she created this just for her son, but then other mothers saw it and asked her for one. Next thing you know, she’s in business, just from solving a simple problem.

It is the same with investing. If you can find an investment with a problem, and solve that problem, you win.

Many investors shy away from problem investments, but it is in the problem where the profit lies. Look no further than our current economic situation. There are problems galore, and more to come.

What if you were able to invest in the first company to solve the problem of finding the alternative to oil and gas? What if someone created a viable and scalable solution to inexpensive housing in third-world countries? What if you were the first to invent delicious zero-calorie chocolate truffles? Do you think investors would be lining up?

A real-world example

One of the simplest upside potentials for several of the apartment buildings that Robert and I have invested in with our partners, Ken McElroy and Ross McCallister, is to add washers and dryers to the units in the buildings we purchase. There is an upfront cost, but the advantage is that it increases the NOI (net operating income = gross income minus expenses).

The value of an investment property is derived from its NOI. The higher the NOI is the more valuable the property. Whenever you can increase the income of a property, you increase the overall value of that property.

The simple task of putting washers and dryers in the apartments allows us to charge additional rent. This may equate to only $50 per unit, but if you have 200 units, that increases the income by $10,000 per month or $120,000 per year. If you had a 10-unit apartment building, a $50-per-unit rent increase would increase your income by $500 per month, or $6,000 per year. That one step alone increases the value of your property.

Open your eyes

Of course, finding upside requires opening your eyes to the possibilities around you. The difference between good investors and great investors is found in the ability to see what others simply don’t see. This starts with financial education and continues through practice.

The world is filled with problems that need solving, both through business and investments. Today is your day to start looking.

Original publish date: March 13, 2014

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