Wouldn’t it be nice if you could just wave a stick and make your portfolio magically grow? Seems impossible right?
Imagine forcing the growth of your stock portfolio or 401(k). A little tweak here, a little tweak there… and there you have it. Instant growth! We’d all be rich. Unfortunately, that’s not how the stock market works.
For most investors, it would be nice just to ensure your portfolio doesn’t shrink – let alone grow. But when it comes to stock appreciation, investors have no control over its growth or otherwise. Investing in Apple then buying as many iPhones for the family as you can does not impact the stock.
Posting on your personal Twitter that you just bought APL and that everyone should be buying it too isn’t going to move the needle on Apple’s price.
Forcing growth in your portfolio sounds impossible . . . . and for retail investors, it simply is.
With Wall Street, unless you’re Warren Buffett in any other year, you are powerless to force growth in the stock price of your holdings. There are too many forces at work that are out of your control for you to personally force appreciation of your stock holdings.
In 2020 – the year of COVID-19 – even Warren Buffett has found himself powerless to move stock prices and influence the performance of his portfolio. The legendary investor actually stopped trying and liquidated billions in stock and sidelined his cash for better days.
Wall Street is unpredictable. Force appreciation? No chance. There are too many factors at play to influence a stock’s price – let alone even predict its movement.
Here are some of those micro and macro factors at work:
- Economy.
- News.
- Supply and Demand.
- The Market Place.
- Short-Term and Long-Term Investors.
- Interest Rates.
- Dividends.
- Management.
- Investor Sentiment.
- Political Climate.
- Demographics.
- Trends . . . . and the list goes on and on.
HERE’S THE GOOD NEWS: Not all portfolios act the same.
Unlike with stock portfolios, with real estate portfolios, we can force growth.
Most real estate organically appreciates over time because of inflation and increased demand from population growth and stagnant supply because of limited space (think New York and L.A.).
This market appreciation is out of our control; however, the most important thing to remember about market appreciation is that you want to make sure you’re in a market with long-term prospects for market appreciation and not depreciation.
A market experiencing market deprecation due to an ongoing exodus of businesses, workers, and residents are the wrong market to be in.
There’s another type of appreciation in real estate and that’s forced or proactive appreciation – appreciation an investor can directly force.
Skeptical about forced appreciation? Prospective investment properties are actually categorized by the level of appreciation an investor has the ability to leverage.
You’ve heard of properties categorized as core, core-plus, value-add, and opportunistic?
At one end of the spectrum, you have core properties that have high low vacancy rates and need little to no improvements. There is little opportunity to force appreciation of these properties.
On the other end of the spectrum, you have value-add and opportunistic properties that offer opportunities to improve net operating income (NOI) and force appreciation through one or more of a variety of strategies including:
- Making moderate to the major exterior and interior improvements.
- Adjust rents to match market rates.
- Add amenities and capital improvements.
- Improve screening to acquire higher quality tenants.
- Reduce expenses through efficiency improvements in utilities including solar installation.
- Improve marketing.
- Improve management and property management for more efficient and cost-effective operations.
By proactively increasing NOI, investors are able to force appreciation of the value of the property as cap rates rise accordingly. This is how real estate differs from stocks.
You don’t see whole classes of stocks labeled as “value-add” stocks, where there are opportunities to add value through your own efforts. Impossible with stocks. Not impossible with real estate.
A prospective real estate asset labeled and marketed as “value-add” is letting you know that there are opportunities to improve the performance of this asset. No other investment class does that.
With real estate, maybe there are too many deadbeat renters, vacancies are slow to be filled or whatever other reason the asset is underperforming. The bottom line is, an investor picking up a “value-add” or opportunistic property has a chance to proactively take steps to grow their investment.
The key to long-term wealth is to be able to control the growth of your investments and not leave it to chance and micro and macroeconomic factors out of your control.
The ability to force appreciation in real estate is why we invest in real estate and why ultra-wealthy and institutional investors have always allocated more than 20% of their portfolios to this asset class.
By leveraging information, knowledge, expertise, and proprietary advantages to exploit value-add and opportunistic opportunities, investors have the power to grow wealth exponentially by forcing appreciation of their real estate assets.
Even small improvements can move the needle. The same can’t be said about stocks.
