How Value-Add Investing is Like Practicing Medicine
Physicians As Real Estate Investors
You take a last sip of coffee, a strong but sweet hit, before turning your attention to the list in front of you. It’s 8 AM Monday and time to start your morning rounds. You review each patient’s case with your team of residents, PAs, NPs and interns who chime in with updates and side comments. Patient 1, simple URI, should’ve never been admitted, Patient 2, a direly ill gentleman possibly beyond the aid of modern medicine, Patient 3, John Smith, a challenging but thoughtful case who after much hard work has turned around and today is to be discharged.
Your entrance to Mr. Smith’s room ushers a smile to his face, one of gratitude and appreciation for the care you and your team have provided to him. You lift the bell of your stethoscope to his chest and listen to the gentle lub-dub of his heart, now you smile too for it is you who is truly blessed for having had the opportunity to care for such a great man.
At first it may seem this experience and the one of value-add investing in apartment communities is as viscerally different as blood and water. Before you decide, lets examine what exactly it is that value-add investors do.
The value add investing strategy: Acquisition
The value-add investing strategy involves 3 major phases: acquisition, reposition and then disposition. Clinicians also run through a similar 3 phase routine: assessment/diagnosis, treatment/plan and ultimately disposition/discharge. During the acquisition phase, the value-add investor finds an apartment community that is not operating at its full health. With clinical precision, it must then be determined why this community is not at its full potential, how healthy it could be, and how to help it to achieve its healthiest state.
"due diligence review allows the value-add investor to determine a treatment plan for the apartment community.
It may not be at its full potential due to deferred maintenance, mismanagement or plain old noncompliance with best practices. In order to diagnose what this apartment community is afflicted with; a financial and physical due diligence is performed. Think of this as a historical chart review as well as the review of any requested tests or studies that must be done when assessing a patient. This due diligence review allows the value-add investor to determine a treatment plan for the apartment community. This step is of major importance because it also determines prognosis --projections for success. If prognosis is poor, it may be best to address goals of care, if good, then this could be a value-add investment worth pursuing. This brings us to phase 2; Reposition.
The value add investing strategy: Reposition
The reposition phase is where all the heavy lifting occurs. This is the treatment phase for clinicians, the point of intervention. For the investor, this is when the treatment plan or value-add business strategy is implemented. The mission is to add value to the community. This can be simple value-adds such as installing energy efficient fixtures to reduce costs and improve environmental consciousness. Or, renovating and restoring burned-out dilapidated buildings, adding gyms or dog parks or planning community get-togethers, or other value-add amenities that create a safer, healthier, happier, more unified apartment community.
These value-adds, addressing each chief complaint, are the gold-standard therapies and medicines that allow these apartment communities to thrive and turn around so vibrantly.
These value-adds, addressing each chief complaint, are the gold-standard therapies and medicines that allow these apartment communities to thrive and turn around so vibrantly. After all the time, and emotion that goes into caring for a patient it is equally rewarding and inspiring to see them improve. The financial compensation is not too bad either. This too is the experience of the value-add investor, facing each stressful challenge during the reposition, rescuing an investment from the brink of collapse and seeing the physically tangible fruits of your labor is a reward in and of itself. The financial compensation is not too bad either.
But, for any patient that is admitted, there is the intent to eventually discharge the patient. Hopefully, in better health than they presented. Similarly, with a value-add investment the interaction is not intended to be indefinite. However, the discharge is referred to as a disposition.
Value add investing strategy: Disposition
The disposition phase of the value-add investment is when the property is sold, and the next investor continues the care and maintenance of the apartment community. This is akin to a patient being discharged from an acute care facility to a rehab or to the care of a clinician in their local community. This is the exit to the value-add investment and where it comes full circle as the profits and experience gained allow you to do it all over again.
After the successful completion of your value-add business plan you prepare to make a timely exit. You visit the apartment community, an initially challenging but thoughtful case that after much hard work has turned around. You see the smiles on the faces of the grateful residents that now live in a safer, cleaner, healthier community. There’s an energy in the air. You can feel it…beating…pumping…through each resident. Now you smile too for it is you who is truly blessed for having had the opportunity to care for such a great community.
As you savor that moment, hopefully, you realize that you already are a value-add investor. Investing your time, energy, knowledge and emotion into each patient you care for. You may not start referring to treating your patients as a reposition, but now you understand that your clinical value-add investing and value-add investing in apartment communities have more in common than blood and water. Like clinicians, value-add investors diagnose and solve problems, implement treatment plans, assess results and continue care for a time that is deemed appropriate.
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