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**. Usually a bank loan collateralized by the home — but both *the lender* and *what backs the loan* are variables, and they can matter more than the property itself. The lender can be a bank at market rate or a mission-aligned philanthropist offering a below-market [[Interest-only loan|interest-only]] loan, which is sometimes the whole difference between a deal penciling or not (see [[Lighthaven's finances - only possible thanks to a 5% interest-only loan from a philanthropist|Lighthaven]], which only works because one philanthropist holds its mortgage I/O at 5%). The collateral is usually the home, but newer structures pledge *other assets*: "crypto mortgages" now let a buyer borrow against crypto for a down payment, or count it toward reserves, without selling it,[^1] and venture lenders secure debt against company equity (roughly Silicon Valley Bank's old model). Mostly niches today — but they're the menu of how a purchase gets financed. **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).* **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? --- *Footnotes* [^1]: "Crypto mortgages" let a buyer use crypto toward a home without liquidating it — counted toward income/reserves, or borrowed against for the purchase or down payment. Newest variant: Coinbase-held BTC/USDC borrowed for a down payment on a Fannie Mae–backed Better Mortgage loan, the crypto held "in custody with Better Mortgage… for the life of the down payment loan, and… returned to you once the down payment loan is repaid." Julian Hebron, ["What is a crypto mortgage?"](https://thebasispoint.com/what-is-a-crypto-mortgage-and-whats-the-role-of-fannie-mae-coinbase-better-mortgage/), The Basis Point, Mar 26 2026.