Finding Hidden Profits
Every investor wants to make a big return. The questions become, “What separates average investments from great ones? Where can hidden profits be found?” The answer is in the upside.
Upside, music to an investor’s ears
What is upside?
It’s what you can do to increase the value of an asset. Upside is what makes a prospective investment especially attractive to an investor. Upside is the opportunity to significantly increase the income or the value of an investment in the future. It’s in the upside where the greatest profits and returns are made.
Examples of Upside
- The upside of a poorly managed apartment building could be to increase revenue by replacing non-paying tenants with good tenants.
- The upside potential of a pharmaceutical company’s stock would be the announcement of a medical breakthrough.
- The upside of gold would be that the government continues to print money.
Finding a solidly performing investment is great but finding an investment where you see the opportunity to increase value with an outstanding upside is what gets the adrenaline flowing.
Where to Find Upside
The upside is often found in problems. Think about the great entrepreneurs. Most entrepreneurs begin their business because they’ve come across a problem in their lives and thought of a solution.
Mothers are a great example of this. Just recently I heard about the mother of a two-year-old boy. She wanted to give him water out of the small water bottles you buy in the store, but he had trouble maneuvering the bottle.
He always ended up spilling the water all over his shirt and pants. This woman invented a “sippy cup-like” top that screws onto the top of water bottles. At first, she created this just for her son, but then other mothers saw it and asked her for one. Next thing you know, she’s in business, just from solving a simple problem.
It is the same with investing. If you can find an investment with a problem, and solve that problem, you win.
Many investors shy away from problem investments, but it is in the problem where the profit lies. Look no further than our current economic situation. There are problems galore, and more to come.
What if you were able to invest in the first company to solve the problem of finding the alternative to oil and gas? What if someone created a viable and scalable solution to inexpensive housing in third-world countries? What if you were the first to invent delicious zero-calorie chocolate truffles? Do you think investors would be lining up?
A Real-World Example
One of the simplest upside potentials for several of the apartment buildings that Kim and I have invested in with our partners, Ken McElroy and Ross McCallister, is to add washers and dryers to the units in the buildings we purchase.
There is an upfront cost, but the advantage is that it increases the NOI (net operating income = gross income minus expenses).
The value of an investment property is derived from its NOI. The higher the NOI is the more valuable the property. Whenever you can increase the income of a property, you increase the overall value of that property.
The simple task of putting washers and dryers in the apartments allows us to charge additional rent. This may equate to only $50 per unit, but if you have 200 units, that increases the income by $10,000 per month or $120,000 per year. If you had a 10-unit apartment building, a $50-per-unit rent increase would increase your income by $500 per month, or $6,000 per year. That one step alone increases the value of your property.
Open Your Eyes
Of course, finding upside requires opening your eyes to the possibilities around you. The difference between good investors and great investors is found in the ability to see what others simply don’t see. This starts with financial education and continues through practice.
I encouraged you to open your eyes to the possibilities around you to find upside. When you do so, often you’ll find it in the most unexpected ways.
Here’s a short story about my friend Donald Trump that wonderfully illustrates the concept of upside—and the value of creative thinking in finding it.
When Donald Trump and I first started writing Midas Touch, he invited Kim and me to visit him at Trump National Golf Club in Los Angeles. As Mr. Trump was giving us a personal tour of the gorgeous oceanfront golf club, he stopped in front of the main ballroom and said, “I’ve got to tell you a story.”
The story began with a problem: The main ballroom at Trump National had seating for a maximum of 150 people, so they could not compete with other venues for requests for parties larger than that number. The folks at Trump National began looking for a solution.
The “Obvious” Solution
The most apparent answer was to add an addition onto the existing ballroom. The bids started coming in.
When the final numbers were tallied, the total cost of the addition, including additional chairs and tables, came to an estimated $3 million. The project would probably take six to nine months to complete. $3 million and nine months is a lot of money and time.
The Upside Solution
One evening Donald was walking past a large party in the ballroom. He paused for a moment to observe the celebration, thinking about the problem of how to expand the ballroom to accommodate more people.
He noticed an older woman struggling to get out of her chair. The ballroom chairs were very nice, but they were big and heavy. They were awkward to maneuver.
That’s when the idea struck Donald. Instead of building an addition onto the ballroom, why not get smaller chairs?
The next day his team started researching this idea. The final result? They found smaller attractive chairs that increased the seating capacity from 150 to just over 250 people.
On top of that, they were able to sell the existing large chairs for more money than the new chairs cost! Trump National increased the capacity of their ballroom so they could now handle parties of up to 250 guests.
Instead of costing Mr. Trump $3 million, he actually made money on the deal. Now that is putting your creativity to work while adding considerable value to your property.
While it may be true that the obvious solution can be the right one, successful people also explore many avenues that may bring much more considerable upside to a deal.
In short, they think creatively and look at the world with open eyes.
Editor, Rich Dad Poor Dad Daily