One of the fundamental profit centers in real estate investing is referred to as capital appreciation.
There are basically four ways to make money in real estate. We call them A, B, C, and D:
- Blocking taxes
- Cash flow
- Drawing down the mortgage or principal pay down
Out of those four things, capital appreciation is the biggest one. It's the value added component. When we talk about capital appreciation, we're saying that we're going to push the value of an asset through the activities that we do.
Unlike a single family home, where you're hoping that the market rises, we can positively force the value to appreciate on an asset through pushing the NOI or the cash flow of the property. We can do that through things like renovating units, renovating the exteriors, increasing the rents on the properties, managing expenses. By doing that, we can push the value of the asset within our control and appreciate the value of the asset.
Capital appreciation comes alongside the taxes, the cash flow, and the principal pay down, but it's the biggest component of the four, in terms of how we make money in real estate.
With Nighthawk in particular, we generally have a five to seven year holding period for our assets. That's a fairly standard holding period across the industry, as well. When looking at that five to seven year hold period, how much can your average investor expect their property to appreciate during that timeframe?
Overall, a doubling of investors returns over about a five to six year holding period. That works out to a 15 or 16% rate of return on their investment. When you talk specifically about capital appreciation, here are a few examples of deals that we've done.
- We bought a property called Tree Haven that is 70 units in Huntsville, Alabama, a nice growth market, for $1.6 million. That was in 2018, and sold it for $3,000,00 3 years later.
- Another asset that we bought for $6.8 million in 2017, we still have, an it's currently valued at $18 million. That's been a big success story as well.
- Last is a property called the Davis, also in Huntsville, Alabama, we bought for $18.1 million just a few years ago. It's currently valued around $40 – 44 million.
- So, big capital appreciation going into those markets, and that's all coming from renovating units, increasing the rents, and pushing the cash flow on these assets. You take all that cash flow and you multiply it times its cap rate, and you're gonna get big capital appreciation.
One thing you might be thinking right now is, At what point does Nighthawk decide to sell the property?
Often when we decide to sell a property, it's because we think that we can't push value anymore, or we've reached the the holding period that we expect it to for our deal. We want to deliver on our promise to investors of returning their capital back to them. So it's a combination of can we add more value? Have we reached our entire time period? And also, what is the market right now, is it's a good time to sell?
We take all of those factors into consideration. At the partner level, we talk about those issues and make a joint decision whether to sell the asset.
If you're interested in hearing more about Nighthawk's investment properties and you have not yet scheduled a call with us, please feel free to do so by visiting NighthawkEquity.com/join.