Transcription
All right, I'm going to share with you my most profitable real estate strategy. Normally, when we're looking at real estate, we have this general idea or thought that high risk means high returns, like development. Now, why? Yes, generally that's true because of equity appreciation, but it's also looking at really, really high risk. That always made us nervous. So how do we get over that and how do we get not a subpar real estate investment that cash flows, but it takes you forever to make your money back? That was the ultimate idea. We wanted to merge these two ideas together. Here's how.
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We buy properties like the one that you see behind us. We are currently doing over eight of these across the United States. It is a cash-flowing existing property, but you'll notice it has a lot of land, and there are acres of land behind it that currently have vehicles sitting on it. What we do is we buy the cash-flowing asset. We come in, we update it, and we build on to it, so we expand the asset. That way, the whole time during expansion, the whole time during the overall build, we're getting paid. It's paying our bills. Once all the units come online, we can fill it up, but we already have the base of cash flow. Yet we're adding existing square footage, we're adding revenue, and two, because it's nicer, we're adding higher revenue in place.
So the property we're buying, this is the kicker, this land. The land that we're buying over here, we're not paying for it. Why? Because the cash-flowing asset is valued at a cap rate, or it means it's valued predicated on income. So lots of times, the asset that is cash-flowing, generating income and wealth, force already. Guess what? It was cheaper than if we just bought the land anyway. One of the best parts of the expansion process is with commercial real estate that you pay for rentable square footage, right? So you're not paying for anything that is not being utilized because it is predicated on that income. Like we talked about, net income and a cap rate equals value. If there's no income, it's not applied to the value. Well, all of this is empty land, and you can see the units behind us, but this is unutilized land. Now, the land does have value, but it's not put in that way. That means we can build out on all these spots, and we have the cost to build, but then as we rent it up, we have more square footage. That revenue, outside the cost to build, isn't applied to any expenses. Why? This is already applied to expenses. So the cost that we paid is including the expenses to run all of this. So all new assets only goes to the net income. It goes straight to the net income. That revenue does, obviously, outside the cost of building, which therefore increases massively the value. All while, once again, paying for it while you own it. That's why this is such an excellent, excellent strategy. We're increasing margins, we're increasing net income, we are keeping risk low because it's already cash flow and paying for this asset as we have it now.
Now, you got to remember, the risk with development is that you're putting product out on the market that there's no demand for. So then you have empty product. Now, you incur that risk when you do an expansion because you are doing part of a development. You're putting product onto a market that is not cash-flowing and doesn't have proof, even demand. So the best way to limit that, since you already own it, it's already zoned, you simply do it one at a time. Meaning maybe one building where you have 50 units, instead of putting a hundred units or 300 units, you do 20, 30, or 50 at a time. You fill it up, and then you build the next one. So you keep going as there is demand. And you look at the asset that you already have, and you can see, all right, we have huge demand for whatever that may be, 10 by 20s. Well, then I'm going to build 20 more 10 by 20s because I have no inventory. Everybody wants that product, and I'm raising prices. You can selectively put product onto the market in the time frame in which you are comfortable with, therefore lowering your risk and also specifically targeting that market with demand that you already know exists.
All right, theory is great, but let's go look at the numbers on a facility that we did just this. Let's see how it plays out. Now, for the fun part, the money. So what I'm about to show you is a facility that we did that exact same strategy on. We did it through a conversion. We're going to walk through how much we purchased it for, what we did, and what the returns associated with that were, also in the time frame. And you can see it in our revenue chart. This chart is a revenue chart of a facility that we purchased that was already existing and it was cash-flowing day one. The cash flow that was going day one was nine thousand dollars a month. That is the starting point at the chart because it shows our revenue over time.
So this facility, we bought and we paid 3 million for it. At the time, that was overpaying. Now, we did this because we were confident in the value-add system. Right out of the gate, we immediately improved operations, we changed rental rates, we improved the overall acquisition process of the customers, marketing. We did a lot of things to that facility. Within just three months, we had increased the gross revenue to over $400,000. That's a $260-plus thousand dollar net. That changed the value to $4.7 million within three months. Now, because we had such that dramatic change in value, we're able to get a loan to build out the rest of the facility at no cost to us. We didn't need to put anything more into it. This gain, this $260,000, paid now for the buildings to be built. We did that, and as you can see right here, we had a drop in revenue. Now, that drop in revenue was because we had to kick some of the tenants out. But remember, we took revenue from $9,000 a month to almost $40,000 a month in three months. So this drop was still over three times more than we had previously bought it for. During this time right here, we built out the new units onto the facility. We opened in July of 2020. We had purchased it in '17. So it took us almost, took us a full two years and into the spring and the next one when we opened up right then.
Now, within one year of opening it, right to about the first part of 2022, we hit our net income at $80,000 a month. Annualize that with fluctuations of seasonality, it was over $800,000 in gross revenue. That's over $600,000 in net. That equals to an over $11 million valuation on the property that we had purchased for $3 million from 2017 to 2022. And our revenue since these numbers were reported have continued to rise. Yes, we can see how much money we're making. Yes, that's a big number. This is why I love the strategy so much. Our new increased revenue that we were receiving from the asset when we bought it paid for the development of all the units on the property. That means we were able to go through this phase, this phase that took right about two years to complete from taking the land and starting to build the units to getting them to the point where they could be open. The asset continued to pay us. We made money for it. It was paying us to expand, to build it. Then the upside, the big upsides that we see on developments. In this case, we had a total upside from roughly $30,000 to $80,000, a $50,000 upside. We still captured it. So we were able to capture this massive upside with the development while being paid to do it, therefore lowering our overall risk. We get a cash-flowing asset, but the upside of a development. That is why my favorite strategy is expansions.
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All right, there's a lot of opportunity to be had with developments, but lots of times developments can be scary, especially for people just starting out because there is no existing revenue. So it's hard to measure and understand demand. Buying an existing facility and then expanding it allows us to see what's happening in the market immediately. We can see the pros and the cons, which units people like, which ones they don't, and then we can see the units which have really high demand and aren't price-sensitive at all, meaning that we can charge much higher rates. From there, when we're developing, we are matching the market. That's what we did at this beginning process, this buildup phase that we had that we bought it and turned it around. We were actually doing market testing. We were testing which units we should build, make the most money, and had the least likelihood of remaining vacant. There's a lot of ways that this model reduces that risk, not just from the cash flow, but from what we learn from it that allows us to build to the market from experience, not looking at what other people are doing, but what we're actually doing. And we can test price sensitivity in the market. This is a huge upside. Expansions are my favorite model because we get the upside of developments, but we lower the risk through acquisitions. We're combining those two models. It also allows us to test and accurately measure demand to understand what we should be building out and the price points at which we can receive for those products on the market. If you don't have that, it can seem scarier or overwhelming if you're trying to develop or enter into a market and figure out what you're going to price. That's all about understanding the market. And to understand the market, so you can understand price points, projections, and even if you're trying to build, check out this video right here, and we do a deep dive into market analysis to help you find the best market to develop or acquire in.