Below, let's cover the details of each of the 5 levels, along with the risks and cost limitations of not aiming for at least Level 4. We will then explain how to achieve excellence at any level, and be able to get a 5-star performance.

LEVELS

LEVEL 1:  Own use.

Most people think that buying a home to live in is a profitable investment. The reality is that it depends on many factors: market timing, purchase price, financing conditions, operating and maintenance cost especially property taxes, energy or condo type of taxes). People don't bother to compare buying to rental prices.

What is the asset potential price appreciation. Different when investing just before or after the 2008 financial crises, before or after the crazy Covid hype.

All other levels above level 1 are all in the context of use by others. 

For each subsequent level, Investor need to learn the various game strategies and pick the most appropriate and efficient. 

The number of stars investors will be able to gain depends on their knowledge and use of how to do the math for Capitalization Rate, Return on Investment, Internal Rate of Return, Payback, Time value of money (Net Present Value), Return on Asset versus Return on Equity, After versus before tax returns.

LEVEL 2: Flippers

We find here investors looking for a quick profit. This is the highest risk type of investment of all 5 levels. The success depends greatly on the timing of both the acquisition and resale of the asset. Even with the best insights and for the best analysts, the problem is that markets can be unpredictable and depend on many things outside the control of the investor (public policies on immigration, bank rates, unpredictable global crises...). The success also depends on cost control, ability to get contractors on the job efficiently, ability to scout good opportunities, very hard work, intimate knowledge of the local market, financing abilities and great luck. 

LEVEL 3: Holders

These investors are in the longer term game and take much less risk than flippers. 

In that group, only a fraction knows about the Buy Rent Refinance and Repeat (BRRR) model.

Investors need to master the use of creative financing such as vendor financing, "lease to own", wholesaling and other elaborate models or type of assets to purchase (single unit residential, multi-unit, low or high rise, commercial, mixed commercial/residential, industrial, agricultural, institutional). Most don't understand niche areas such as storage facilities, mobile home parks, subsidized social housing...

Since most developers are greedy and impatient, they favour the flip model, which is a lot riskier than build and rent.

LEVEL 4: Land developers.

Land developers have an edge over investors of lesser levels and solve that problem these other levels have with buying existing buildings. With existing buildings, that there are very limited efficiencies, lots of leg work each time (building inspection, custom renovations) and a lot more risks with aging structures that may have unknown issues. The only way to possibly have some success at lower level games relies on spending an extraordinary amount of time finding properties at least 10% below market value, and this at the lowest feasible risk.

On the others side, even when land developers invest in good quality land at a premium, they can get real efficiencies as they scale up. 

But few investors have imagination and creativity, and prefer to do business as usual instead of acting as disruptors. Higher star investors understand the most appropriate and effective models, such as Build Own Rent versus quick flip after some phases of pre-construction development. Not many understand the value of Build, Rent, Refinance and Repeat (BRRR Version 2).

Even most BRRR experts limit their scope to buying existing buildings like Level 1 to 3 investors do. Buying land to build-ups the opportunities for profit and efficiencies. 

Land developers often operate at a profit margin of 20 to 30% if they are any good at what they do. Buying from the existing building stock, it is very difficult and time-consuming to buy at 30% below market value.

Smarter developers have a holistic view and do not rely on low quality material and design that is costly to operate. The 0.01 % of people who build with better (truly green) design and more durable material don't understand the value of Near Zero Energy, Net Zero or the ultimate, Positive Energy buildings. With Net Zero and Positive energy buildings, you can make the profits utilities would otherwise make. Solar systems can be installed more efficiently if done from the design stage and with building integration where you save on labour and roof cost as well as installation, and all the logistics.

Only a tiny minority of investors in that category seriously look into multiple streams of income. For example, the ability to charge extra for additional value such as improved parking, laundry, EV recharging, for electricity produced onsite thanks to solar PV.

Top ranked investors in that category know about alternative designs (i.e. passive solar) and alternative building material that perform better overall from a technical and life cycle economics. They do not limit themselves to wood frames structures for low rise buildings. They do not limit themselves to traditional steel and CO2 intensive and corrosion prone reinforce concrete beam structures, with all the layers of cost, risk...

Wood structures risks are so many: mould, lack of fire resistance, buildings blow away in hurricanes, tornadoes, bugs eating the wood.... and the list goes on and on. Maintenance and rebuilding after disasters results in a prohibitive yearly cost of 8% of built asset value asset per year average maintenance cost when it can be less than 1% with smart design and material.

LEVEL 4: Master Land Developers

These are land developers who build to rent with materials and designs that reduce both risks and costs (initial and operating) to the absolute minimum, while increasing the values and returns to the absolute highest values.

This can be obtained by switching from traditional construction materials (wood frame building, buildings made of steel and beams) to materials like stabilized Interlocking Compressed Earth Bricks (IS-CEB). With IS-CEB, it is possible to erect the whole structure of a 100 m2 house in 48 hours with 6 unskilled low cost men and to build the rest of the house in 8 days with roof and all finishes (as demonstrated by Brique de Guyanne). Interlocking, LEGO type of CEB typically result in 30% construction cost reduction.

LEVEL 5: Ace Land Developers

Here we find the developers investors who graduated from Level 4, and leverage on various efficiencies.

Getting to the 5 star ranking

Getting the 5-star ranking requires making deliberate efforts to increase efficiences in the main areas below

Human:

What is the level of training of their team (Academic or Continuing Education), to what level do they use effective productivity tools and methods.

How efficient are the interactions with various stakeholders (sellers, realtors, lawyers and notaries, building contractor, government. 

Organizational:

How functinal is the organisational structure.  Do they use innovative and effective organizational models that reward or empower the stakeholders, like networks of partners as peers with supplier-client relationships versus just the old fashion archaic, ineffective, pyramid/hierarchical model where employees are glorified slaves.

To what extent does the investor leverage on Other People's Time (OPT), and collaboration.

Use of collaboration models, such as COOP Housing, labour participation models such as the model of Habitat for Humanity where future occupants are required to invest their time (sweat equity) into the construction of their future home. Do people leverage external resources or only limit themselves to internal and local expertise, or will they seek the assistance of the most effective human resources, regardless of location and beyond short term initial cost considerations.

Technical

How are the resources used. What tools, templates and models are in place. Does the organisation have a strategic plan, use project management tools and proper planning, scheduling, oversight, validation, due diligence.

How is the office space optimized for productivity, communication and collaboration. What tools are used.

Financial:

To what extent does the investor leverage on Other People's Money (OPM).To what extent does the investor leverage on Other People's Assets (OPA), such as land, tools.... What is the level of use of non-traditional forms of financing such as Coop Banking, or Multilateral banks for large housing projects. 

Does the investor know when to invest and when not to, based on the result of comprehensive preliminary feasibility. Does the investor always buy the land and equipment required, or do they conduct a cost benefit analysis of what could to verify the need to acquire (with own cash and credit) land they develop. Is it possible to build on other people land, for example, using the model of Singapore Housing and Development Board who built a huge collection of real estate assets for public housing on land thanks to long term (99 years in their case) emphyteutic lease.

Risk Management:

Are risks anticipated qualitatively and measured quantitatively (R= Impact Level x Probability Level) and, for each of the major risks identified, are mitigation strategies put in place.

CONCLUSION

Knowing all this, every Real Instate Investor needs to ask themselves at what level and performance they are operating, and at what level do they want to aim for. How many stars would they get if measured against all the criteria above.

RECOMMENDATION

Individual, private and public investors would be wise to seek help from E3Habitat operate at 5 star performance in Level 4 and 5. For this it offers various learning opportunities such as online courses, workshops and an annual conference. 

To get more information, visit E3Habitat.org and connect through E3Habitat social media resources (see Social Media icons at the top of the home page of E3Habitat.org