No Substitute for Goals, Strategy & Discipline

It’s almost a cliché to say that smart investing is driven by goals, guided by strategy, and maintained through discipline, but that doesn’t make it less true.

When I started off as a real estate investor, one of my early goals was buying a single rental property every year for 20 years. I thought I could live on the cash flow and possibly sell them for additional income one-by-one during retirement if I needed to.

The “BRRR” (Buy-Rehab-Rent-Refi) Approach

My strategy was simple: I bought fixer-upper properties in decent neighborhoods using savings and later hard or private money (or even credit cards, believe it or not), got them rent-ready, and then refinanced to get my capital back out. This is what people today call the “BRRR” approach.

What made it all work was that my wife and I had the discipline to maintain a lifestyle that allowed us to acquire properties gradually over time. Classic get-rich-slow approach.

We eventually passed our original goal, owning about 40 doors at our peak. I was also managing over 100 properties at the time, so I knew what was ahead of me if I kept on the property-acquisition road, and it wasn’t that appealing because of the usual ”tenants, toilets and townships” hassles.

Later we changed our personal goals from being 100% active to being more passive investors, and so we shifted to owning notes instead of properties. This early real estate strategy was the foundation of my family’s net worth, though, and we still own 18 properties.

Re-Investing Quickly vs Building a Store of Dry Powder

Recently I was running through some numbers with my youngest son. We looked at the overall expense of my real estate portfolio over the years, and we found that although I usually had a surplus of cash flow, I almost always rolled it right back into my portfolio, whether that was to sustain or improve a property I owned or to purchase a new one.

The approach of constant re-investment made sense at the time, given my goal of owning as many doors as possible, as quickly as possible, but one thing I realize looking back was that I left myself very little “dry powder” of my own to work with.

“Keep your powder dry!” (antique powder horn kit)

“Dry powder” in the investing context means untapped, usually liquid, capital that you have at the ready. Not to be confused with having an emergency fund for living expenses, having dry powder means that you’re ready to “pounce” (as one of my real estate agents friends likes to say) on a good but fleeting investment opportunity.

Even though I figured out early on how to use OPM (private money) to acquire properties, I’m sure I still missed some great deals over the years because I didn’t have the capital I needed to be able to “pounce” on short notice.

The downside of having a store of dry powder, of course, is that your yield on it is low-to-zero, and that drags down the overall return of your portfolio.

Maybe because of my personal aversion to having a surplus of dry powder on hand, I was pretty surprised when I saw some recent data on how much dry powder is building up in the market.

Dry Powder Trends

Here’s what the data provider Preqin found in their latest survey of real estate fund managers:

Is this a Dealflow Problem?

What’s going on here? Why the increase in un-invested capital over the past five years?

If I had to guess, based on what I see in the real estate markets around the country (and PPR tracks this carefully since real estate values directly influence the values of the notes our fund owns), the issue is finding suitable properties to acquire.

As you’ve probably noticed in your own market, real estate prices are bumping up against or even blowing past the levels we saw pre-Crash. Most “deals” available today aren’t really deals anymore.

What Can a Value-Add Investor Do?

For those of us who operate in value-add mode by buying “dinged-up” real estate and real estate-backed assets (notes), it’s certainly harder to find good deals today, and that trend will likely continue.

Another reason individual investors wind up sitting on excess capital is that it takes time to vet opportunities and deploy the capital (do the paperwork), and time is the one thing none of us seem to have anymore. I know this is true for me. Sometimes it feels like the best investments these days are ones with the least amount of paperwork…

So maybe that explains why so much dry powder is building up in the market. It’s waiting for the kinds of deals we saw back in 2010…

Stop Looking for Needles in Haystacks…

So, if you’re sitting on dry powder, waiting on the perfect deal to come along, take a look at one of my recent articles about having a business (or investing) model that depend on finding needles in haystacks.

Does Your Business Model Depend on Finding Needles in Haystacks?

My main point in that article is that the investment opportunities are still out there if you know where to look.

And as always, if you want to hear about the opportunities available to investors via note investing or with PPR’s note funds (current offering has a 12% Preferred Return), contact PPR’s Investor Relations department.

Here’s to keeping your powder dry… but maybe not having so much of it,

Dave Van Horn