Here's roughly how it works, broken down by category. Note that there are several ways to do each stage. ### Acquisition **Find a property**. If you can find a property that's below-market, that's an (uncommon) source of alpha. Some examples: perhaps the owner is distressed and can't afford payments anymore, or you're friends and they don't want to go through the stress of preparing a house for the market, or it's a foreclosure auction. **Buy with debt**. Partner with a bank and get a loan collateralized by the home. **Buy with all cash**. For example, [[The Omar Morales strategy - buy all-cash, return capital, co-own cash flowing property forever]] relies on all cash deals. ### Operation **Redevelopment**. If you acquire a property with redevelopment potential, redevelop it, and stabilize the property by finding tenants at a higher price point, then this is the most common arbitrage opportunity. Common sources of redevelopment potential are if the property has been neglected by its owners, if a neighborhood is up-and-coming, or if the property has [[Unused zoning capacity]]. A developer will often finance the redevelopment phase with an interest-only loan and either sell or refinance before the loan term ends. **Optimize taxes**. See [[Tax advantages to real estate investing]]. ### Exit **Exit by selling**. At this point, you can sell the stabilized property. This strategy can generate higher [[Internal rate of return (IRR)|IRR]]s but requires shorter hold periods, usually of 3-5 years. **Exit to community / cohousing**. This is exit by selling, but you first offer the property to members of the community. This strategy could be used to transition a coliving house into cohousing. See: [[Develop coliving, exit to cohousing]]. **Exit by [[Refinance|cash-out refinance]]**. Alternatively, you can use the newly uplifted market value of the property to cash-out refinance and use the proceeds to return capital to your investors. This allows the GPs to retain the property and future cash flows. *This is my goal for the Neighborhood: to redevelop houses for coliving and hold them forever (and continually replenish them with great housemates via regular unconferences).* **Exit by granting to [[Community land trust (CLT)]]**? #Research **Dividing cash flows**. There are two types of value to split between two types of parties in a deal (also called a "real estate syndicate"). You can split cash flows however you like between the two parties, but there are common ways to do it that shape everyone's incentives. - The two types of value to split: 1. Cash flows from renters 2. Any appreciation realized at exit - There two types of parties in a syndicate: 1. GPs (also called "sponsors"), who arrange transactions and manage the property 2. LPs, who provide capital - Usually LPs get the first 8% of annualized returns (the [[Preferred return and promote|preferred return]]) and any returns beyond that are split (commonly 20/80 or 50/50 - the portion to the LPs is called the [[Preferred return and promote|promote]]). However, [[Promotes are incompatible with indefinite hold periods]]. --- #Question: what are strategies for finding below-market properties?