Real Estate: Creating Wealth: Active And Passive Appreciation

Real Estate: Creating Wealth: Active And Passive Appreciation

Author: Patrick Leblanc

How to create value in investment real estate in any real estate market.

With many areas of the country experiencing a real estate correction, savy real estate investors are investing in properties where they can increase a property's value. These investment situations are called value plays. Many think value plays mean rehabilitations but rehabs are only one of five value play scenarios. Investment real estate property value is based upon the property's net income. Value plays allow us to increase value by increasing income, decreasing expenses or both.

Value plays are properties where one or more correctable factors adversely impacted a property's value:

• Bad management, burnt-out landlord / owner (includes bank owned property.)
• High vacancy relative to comparable properties.
• Low rents relative to comparable properties.
• Needs repairs, deferred maintenance.
• High expenses due to poor management.

These factors adversely either directly impact a properties income and expenses (net income) or indirectly via the ability to attract and retain tenants. Value plays allow us to purchase a property below its retail value, correct the problem and increase the property’s value. We call this active appreciation: active because we can control it. If I fix a foundation wall, rehab an apartment, and clean and rent vacant units, I can increase the value of a property by 25 percent. Not bad in six months’ time.

Passive appreciation is market appreciation, an increase in the property’s value because the entire market has increased in value. I like passive appreciation, but in today's uncertain market you can’t bank on it.

Patrick Leblanc is the president of Reflex Investors Inc. and has been investing in real estate since 1991. Reflex Investors buys multifamily properties by offering investors a fixed 10% return in private mortgage notes. Patrick can be reached at http://www.Reflex-Investors.com and http://www.Solid-Return.com