Back in 2010, anything you bought was a great deal. So, you didn’t have to be too creative… just buy anything, with decent financing, and you were probably getting a >10% cash-on-cash return.
For the last 3-4 years, that has not been the case, at all. If you just buy a normal deal and do nothing to add value, you are looking at something like 3-5% cash-on-cash.
If your business, like our business, depends on delivering supra-normal returns, you’ve got to do something different.
Here, broadly, are your options:
- You can expand your opportunity set beyond the one everyone else is looking at. This means looking at new cities, new neighborhoods, new asset classes. It might also mean setting up a system to source off-market opportunities.
- You can change the way you look at the existing opportunities. In other words, you can figure out how to look at the deals everyone else is looking at in a different way, one that allows you to generate better returns from those deals than everyone else would.
For better or worse, at Adaptive, we are very wary of trying new asset classes and geographies at a time when the market is hot. So, we have continued to focus on rehabbing smaller, LA apartment properties, even as many of our original competitors have moved on to new cities, new product types, or ground-up development.
That has forced us towards #2 above. In other words, because we have chosen to operate with a relatively narrow opportunity set, we have been forced to come up with creative ways to add value to those opportunities.
That sounds dry, but each new little innovation allows us to put more investor capital to work profitably, benefiting our partners and ourselves.