Every time I watch this video, it reminds me of the countless times I’ve tried to convince entrepreneur friends that revenues are for lifestyle, but assets are for wealth. It bums me out when I see successful entrepreneurs hit the inevitable downturn in the economy that happens every eight years or so. It is never about anything they did wrong, just bad luck due to world events.
This typically results in a massive decrease in revenue and profit for their business, that they spend years trying to reverse, often unsuccessfully. This is when they wake up to the fact that their business was never building wealth as they thought, it was just sustaining their lifestyle until the downturn arrived.
I preach to all my investors, we are not in the hotel or short term rental businesses so don't think you are investing in whatever operating company I choose to run to service the asset's debt. I am in the business of real estate asset appreciation. I will do my best to drive revenue from any operating company I choose to run, but it will not be my first priority.
What am I talking about? Let's take a look at my Waterfalling Estate property. Thirty six months ago, I formed a real estate syndication and began inviting people in my network to join me in acquiring the famed Waterfalling Estate on the Big Island of Hawaii. Six months later we closed on January 15, 2023. We have now owned and operated the property for thirty months.
My research indicated that the property was severely undervalued (my specialty). Our purchase price was $5.75M. I knew the property cost $12M to build and was only ten years old. Once we acquired the property we decided to operate it as a short term vacation rental property. We charge around $4k per night with a 5 night minimum. Solid revenue when booked. This is upper echelon in the vacation rental industry for sure.
However, is this the main business that we are in? We drive about $600,000 in rental income a year. Our operating expenses run more than that though, creating an annual loss. Most entrepreneurs would freak out and spend all their time desperately trying to generate more revenue to get profitable.
While that is certainly a goal, it is not my main focus, nor is it a concern. Instead, I went I focused the lion's share of my energy on improving the property with the goal of making it more valuable. I shared many of the before and after photos in this group.
Recently, I did a refinance of the mortgage to lower our monthly nut, meaning we could actually do the same amount of revenues and have a chance at breaking even through expense reduction, not more revenue. It may be that we cannot generate more than $600k per year, so this was a good call.
The lender required an independent third party appraiser. What did our appraisal come in at? **A whopping $9,065,000.** This means that in just 30 months our property increased in value by $3.3M. Divided monthly, that is a profit of $110,000 per month. This is double what our monthly revenue is and far more than our best month of revenue ever. Our best month profit was has been about $25k.
So, what business would you rather be in? Our profit from our appreciation is so massive at just over $1m per year, we can easily absorb and carry annual loses on the vacation rental side of things up to $200,000 per year and still be an awesome position as investors.
If your mind is looking to shoot holes in my theory by saying, "appraisals are not proof of a property's value cause they are just paper returns". Three months before this recent appraisal, and after I completed all the renovations, we listed the property for sale. A buyer emerged, but he loved what we were doing so much that he wanted to be join our syndication rather than become the full owner by himself. I sold him a 1/3rd of the property on a $9.5M valuation. So there goes that argument, cause my investors and I now have a "proof of valuation" that is not just ink on a piece of paper. Try to earn your way to a $3.3 profit in 30 months focusing just on your revenue and profit. Good luck!
If you are an entrepreneur that experienced what I am describing, I encourage you to take a long look at your largest non-labor expenses and see if you can convert your business to be in the business of owning and appreciating that asset while you continue to operated your "other" business activities.
For more info on this, I have a website at www.AssetWealth.com. This is not an ad, just a way to get more info.