By James Furlo on
Finding The Wedge: How We Provide Outsized Real Estate Profits
In business school, one of my strategy professors, Robert Wilbank , shared a simple yet profound principle for successful acquisitions. While discussing business acquisitions, he drew two lines on the whiteboard. The first line represents a company's current value over time — this is what you pay for when you buy it. The second, drawn above, represented the company's potential value after the acquisition. Between these two lines lay the "wedge" — the opportunity to add value. His advice was direct:
"This is what you want the company's value to be after you buy it. See this gap? That's the wedge. This is where you add value to the company above and beyond what it originally created on its own. Your goal when acquiring a company is to find the wedge. If there's no wedge, don't acquire the company."
This insight stuck with me because this concept translates seamlessly to real estate investing. Whether we're investing in a single-family home, an apartment complex, or a storage facility, we look for the wedge — the opportunities to increase performance or reduce costs.
Treat Real Estate Like a Business
Rental real estate is, at its core, a business. Think about it: properties have revenue (rent), expenses (maintenance, taxes, utilities), customers (tenants), and even employees or contractors. Each property we acquire is like buying an existing business, and our goal is to find the wedge, just like any business acquisition.
Adding Value Through Rent and Cost Control
Forced appreciation is our favorite strategy because it's creative, rewarding, and fast. For larger properties, value is determined by the net operating income (NOI) — a combination of rent revenue and operating costs. To increase NOI, we look at two key areas:
- Increasing rent: This often requires capital improvements, such as upgrading units, adding amenities, or improving the property's curb appeal. These changes attract tenants willing to pay more.
- Reducing operating expenses: Simple changes, such as implementing energy-efficient utilities or streamlining property management systems, can yield significant savings.
Let me share a few examples of how we've applied this principle.
Example 1: Properly Operating a Storage Facility
One of our acquisitions was a struggling storage facility. It had a 50% vacancy rate, missing tenant leases, and outdated contact information. The previous owners, house flippers, treated it like traditional real estate, which led to poor operations. We bought it as-is, knowing the wedge was in operational improvements.
I contacted experienced storage operators in other markets. They generously shared their best practices, which I used to create a new operational system. With this system, we attracted new customers, tracked all payments, and streamlined our management processes. Occupancy rates increased, rent collection improved, and the property became more profitable. The wedge here was operational efficiency.
Example 2: Transforming a Troubled Apartment Building
We once purchased a 50% vacant apartment building, occupied exclusively by registered sex offenders. This tenant mix made it nearly impossible to attract new renters. To address the issue, we assisted everyone in finding new housing, completely renovated the building, and re-leased it to young professionals.
In this case, the wedge was twofold: physical improvements to the property and a complete overhaul of the tenant demographic. These changes dramatically increased the building's value and rental income.
Example 3: Rebalancing Space in a Duplex
Our first property was a duplex with a cramped kitchen and an oversized living room. The awkward layout hurt the property's functionality. We converted a section of the living room into a dining area, using luxury vinyl plank (LVP) flooring to define the space. This encouraged tenants to move their dining tables into the living room, freeing up the kitchen for additional cabinets and storage.
The result? A more balanced, functional space that justified higher rents. This small yet impactful change was the wedge that unlocked the property's potential.
Our Investment Thesis: Aquire Properties With A Wedge
Our investment thesis is clear: We only acquire properties with a wedge because they tend to produce outsized returns when we put in the hard work of adding value.
Not every deal will have a wedge, and that's okay. Properties already on a positive trajectory can still be worthwhile investments, but we don't purchase them.
When we find the wedge, we take action to add value, then sell the property once the wedge has been fully realized. This cycle allows us to repeat the process and reinvest in new opportunities.
Questions to Find the Wedge
Whenever we evaluate a property, we ask ourselves some key questions:
- How can we make this property better?
- How can we make the property more functional? For instance, can we increase rent by improving the layout or amenities?
- How can we make it more inviting? Will this translate to higher rents or lower vacancies?
- Are there ways to cut expenses? By how much, and at what cost?
- Can we use existing tools to manage this property? What new tools will we need, and how much will they cost?
- Will we attract the same type of tenants? Or will we create a competitive advantage by targeting a different demographic?
The wedge is the cornerstone of our investment strategy. It's not just about acquiring assets — it's about identifying opportunities to add value and effectively executing them. Whether it's a storage facility, an apartment complex, or a duplex, we always focus on finding the wedge, just as my professor taught me. Without the wedge, there's no deal.
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