When I think about what other asset classes are attractive and ripe for innovation and value, I try to start with real estate with a lot of "small business" qualities.

What do I mean by that?

Real estate is owned. Small businesses are operated. 

When you own (and don't operate) real estate, you are competing geographically. Your physical location is your only moat. Now let me make it clear that well-positioned real estate with a great location is insanely valuable. Location is critical.

As discussed in the previous section, I believe industry tailwinds are fundamental. A rising tide lifts all ships. 

But this section isn't about what is most valuable. It's about where you can create the most value and carve out more for yourself. It's about the alpha.

When you operate real estate, you compete with others in a few more areas: execution and management.

And with execution and management-intensive real estate, you can carve out a lot more alpha than you realize. And therein lies the opportunity.

An example:

Let's go back to that facility I purchased in November in Newfield that was doing $25k a month in revenue and $180k a year in net operating income.

Where is my opportunity? Where is the alpha? 

It's in the operations. I can wrap it in technology so customers can pay online. I can reduce the manpower needed to run the business by using software to do almost everything. I can cut costs from $10k a month to $8k a month. 

What about revenue?

Since customers can rent online and get instant access to the facility, I can get more customers in the door at a higher rent. Instead of closing down at 5 pm every day, customers can get service at 10 pm and rent a unit right then. We employ digital marketing and get new customers in the door that way too.

So I can raise prices on all current tenants by 20% and start getting new tenants in the door at that higher rate, too. 

We're going to even out about 6 months from now at $35k per month in revenue and $8k per month in expenses. 

Her profit was $180k a year. Mine will be $324k. An 80% increase. How is that for alpha?

And I can achieve this because self-storage is a lot more like a small business and a lot less like typical passive real estate. I can out-manage and out-market the in-place competition and thus blow away their performance and generate alpha.

How do I think about opportunities in the real estate world?

It depends. If you have a lot of capital and you don't need alpha, the world is your oyster. Buy great assets in great locations and let father time do his work for you. Beta is the most critical factor.

But if you are looking to generate alpha and build a competitive advantage, this section is for you. I think this is the best route for folks who want to get involved, develop their cash snowball, and add value to the property they buy through operations.

If you are going to build your machine with a method to scale up to hundreds of millions in real estate, you need a competitive advantage. So let's talk about some real estate asset classes you could tackle to gain a competitive advantage and my framework for approaching them.

I'm going to go through just a couple of opportunities I think are ripe for the taking right now. These are not the only opportunities. The point here is that you should get an idea of a framework you can use to spot opportunities and undervalued real estate. 

My framework

This is the framework I use for spotting and thinking about opportunities.

#1. A fragmented market with many different operators

A fragmented market means two things: 

There are lots of small-time players to potentially buy from, and there are lots of different business models to study and copy. You can take best practices from many different operators and combine them to get the best possible operating business. 

When we got into the self-storage business, we copied the remote management model from a few operators and the revenue management model from the big operators and applied them both to an entirely new geographical region. And so far, it has been a winning combination.

#2. An operationally or logistically challenging "small business" aspect

I love businesses that are a little bit sweaty with a bit of a challenging aspect to them. This makes them not as scalable. Wait, hold on - did you say not as scalable as if it were a good thing?

Yes. If it isn't scalable, the big money, big operators, and sexy tech startups stay away. This means weaker competition and more opportunities for you!

Self-storage in the small towns I operate in has a major "sweaty" aspect to it. Collecting rent from hundreds of tenants and constant turnover. New tenants cycle in and old tenants cycle out daily. That means phone calls, maintenance, cleaning, and more. 

Non-skilled investors also avoid the challenging stuff. Think about Biggerpockets and the single-family rental boom. Everyone and their brother can buy a home and rent it out. That leads to a lot of buyers and a lot of competition for these assets. 

Self-storage on the other hand - how many folks do you know who are confident enough to buy a self-storage facility and operate it effectively?

#3. Widespread weak competition with unsophisticated operators

#1 and #2 generally lead to a high probability of #3 being present as well. This is the cherry on top.

Study the folks who operate businesses in the asset class you are pursuing. Are they good at what they do? Do they utilize technology? Are they optimizing revenue? Do they run marketing campaigns?

If the answer is no, there is an opportunity.

#4. Technology readily available to streamline but not well-adopted

Is there out-of-the-box management software that could streamline the operations? Are most of the mom-and-pop operators using it?

The answer to the first question is almost always yes, even if you need to get creative and use software designed for something else to streamline your operations. 

When you can wrap in technology, you can save on manpower, and you can create a better customer experience. Period.

Now let's talk briefly about a few opportunities I love for scrappy small business types without enough cash or experience to throw down $10MM on their first property.