Value Management Methodology (VMM)

Photo Credit: iChazIn order to understand the Value Management Methodology (VMM) strategy, it’s important to note the meaning of “value” as it relates to real estate investing. In this respect, value is the maximum amount that generates the minimum required return (yield) commensurate with the risks of achieving it.
Value Management Methodology is an efficient, stable, and prudent investment strategy in real estate. It leads to a proven path with steady growth and limited risk. The methodology is based on a consistent real estate acquisition campaign built on eight simple components of operation and competent profit and loss oversight:

  1. Finding properties.
  2. Negotiating effectively.
  3. Cash flow.
  4. Property appreciation.
  5. Equity build-up (loan reduction).
  6. Value creation (proper management).
  7. Exchanging or selling profitably.
  8. Repeating the process.

This simple and straightforward system incorporates several specific property management methods with considerable emphasis on value creation and the use of equity accumulated in the property. When all these variables interact together, it results in a property that is far more valuable than it was when purchased originally. The investor remains in complete control throughout the process while keeping his risks level to a bare minimum.

The two basic rules to follow are:

  1. Never “fall in love” with an investment property. Love is needed when buying a personal residence but it is not needed when buying an investment property.
  2. When the initial equity in the property increases by 66%, sell and trade up to the next property, with at least 1/3 additional units and higher cash flow.

The Value Management Methodology involves buying relatively smaller multi-unit Residential Income Properties, i.e., six, eight, 12, 24, or more units that require limited, predominantly cosmetic renovations, and some mechanical repairs along with rental income upside potential.  This type of building is considered a classic fixer-upper by industry standards.  The investor using the Value Management Methodology may also acquire properties that do not require repairs at all.

Regardless of which property the investor buys, once he purchases a property a number of value-added improvements should be made to it no matter what its condition. Examples include landscaping, painting, tree trimming, parking lot improvements, common area lighting, pavement repairs, mailbox replacement, property naming, and other small repairs. Additional improvements that are not terribly expensive also should be considered: adding a laundry room, installing a digital satellite TV access, adding an intercom system, adding storage areas to rent, installing vending machines, erecting new security fences and entry gates and adding or changing meters. All these changes should be planned and executed in the first year of ownership.

The ultimate goal is to create a visually attractive, functional and hard to find turnkey property and bring it to market. The improvements will enable the investor to increase the annual income of the property with higher rents or bring those rents up to existing market values. People will pay more for perfectly-maintained landscaping and a properly- functioning building, every time.  As some tenants decide to vacate their units, the new adjusted rents will produce a higher operating income, creating a property that is more valuable. This process is called equity creation.

Assuming an investor is on an aggressive fast-track to wealth accumulation, he or she will want to unlock the newly-created equity within the first 15 months of building ownership.  After this time, he or she will have already renewed leases with existing tenants or written leases at the elevated market rate to new tenants. Additionally, each year, through appreciation (a function of inescapable inflation), mortgage principal reduction and tax-free returns produced by the investment, equity in the property increases. The goal is to create a new property value that is 20% higher than its original purchase price, 15 months earlier. Once that is achieved, the starting equity in the property increases to 66% (assuming a 30% down payment). Selling now unlocks the new value gain in equity on top of the starting equity.

The validity of this methodology proves itself by enabling the investor to take out the original equity plus the additional new equity value gain created by adding and leveraging these sums into a greater property. In other words, it is a systematic laddering process of cash flow and newly created equity value sums, into properties that are at least one third to one half larger in size than the previous property that was sold. This process bridges the gap between small multi-unit properties and larger multi-unit properties with higher rates of return and increasing cash flow. Repeating this process several times puts an investor well on the way to a successful real estate investing career and to creation of significant wealth.

So, let’s analyze now, what would happen to an investor who uses the buy-and-sell strategy (Strategy B, VMM strategy) for a period of 15 years for ten Buy-and-Sell transactions. To be prudent, we’ll use 18 months instead of 15 to account for 45-days escrow period on each side of the Buy-and-Sell transaction. How much property would the investor own if he or she starts with six units and increases that number by 1/3 with each new property acquisition?

15 Years equals 180 months
Property number   1 18 months   Starting with =   6 Units
Property number   2 After 18 mo. – Includes opening & closing of Escrow =   8 Units
Property number   3 After 18 mo. – Includes opening & closing of Escrow = 11 Units
Property number   4 After 18 mo. – Includes opening & closing of Escrow = 14 Units
Property number   5 After 18 mo. – Includes opening & closing of Escrow = 19 Units
Property number   6 After 18 mo. – Includes opening & closing of Escrow = 25 Units
Property number   7 After 18 mo. – Includes opening & closing of Escrow = 33 Units
Property number   8 After 18 mo. – Includes opening & closing of Escrow = 44 Units
Property number   9 After 18 mo. – Includes opening & closing of Escrow = 59 Units
Property number 10 After 18 mo. – Includes opening & closing of Escrow = 78 Units

After ten transactions, investor B purchases his last property and keeps it for the remaining ten years for a total investment period of 25 years from start date (as investor A).

Property #11 – 104 units

At the end of 180 months, (15 years) the investor will own 104 units. Someone who owns that many units will never have to worry about where his or her next paycheck is coming from, regardless the state of the economy. The most important mental attitude for the investor here is to maintain a positive outlook, to follow the plan and not grow discouraged, particularly in the early stages. Every $50,000 or $100,000 investment can grow into a million-dollar estate over time.  This is not a dream. It is a reality. The numbers do not lie.  One step at a time is all it takes.

Photo Credit: iChaz

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