Create value.

Imagine an old, worn-out house in the country. The paint is peeling, the grass has practically grown up to the windows, and the roof is a patchwork of holes. It’s been sitting there for years, and no one wants it. Yet, seeing some potential, you pick it up for a small price.

Then you go to work.

You repaint the walls (inside and out), landscape the entire yard, put on a new roof, and otherwise transform the beat up little country house into a home anyone would be proud to own. As a result, the price goes up and you collect a nice profit.

Why? You’ve taken something without value and turned it into something with value. This is what it means to create value.

Except, it’s not exclusive to houses and their buyers. You can also create value for your tenants, lenders, neighbors, local government… anyone. For example:

• You rent a furnished house to a businessperson that’s only going to be in town for a few months. Because you’re accommodating their exact needs, they pay you a premium for the short-term lease and furniture rental.
• You pay your father-in-law 15% interest to loan you $100,000 to get started in real estate. Because you’re paying an above market rate, he agrees to take a second position behind other loans, allowing you to buy real estate with no money down.
• You buy a rundown apartment building in a low income district and decide to refurbish it to provide higher-quality low-income housing. The Department of Housing and Urban Development gives you a loan to complete the renovations because you’re improving the area, allowing you to raise the value without dipping into your own pocket.

Each time you create value, you also receive a proportional benefit. Create a little value and you’ll receive small benefits. Create lots of value and you’ll receive large benefits.

It doesn’t always come in the form of money, either.

Sometimes, you get back flexibility, services, or general goodwill. But you almost always receive something.

What are some specific ways you can create value by investing in real estate?

Make Improvements to Properties

You can make big bucks fixing up rundown real estate. But why? We all know that there’s typically a higher demand for nice properties, but there’s more to it than that. People like to buy houses in perfect condition because:

• They save time. Fixing up a house takes a lot of time, even if you have professionals doing the work. It’s also a big headache.
• They save money. Lenders might loan you some of the money for renovations, but you almost always end up investing a large chunk of your own money as well.

In exchange for saving them that time and money, they’re willing to pay you a higher price. For example, if you buy a house for $60,000 and put $20,000 into repairs, then it’s fairly common to sell it for $100,000 or more, making a nice little profit.

The model applies to any type of property of any size. A friend of mine in Charleston, South Carolina fixes up old commercial buildings near downtown, fills them with brand-name tenants like The Gap or Wachovia, and then sells them to long-term investors. He makes millions of dollars per year.

Sometimes you also receive other benefits besides money. It surprises some people, but you usually lose money by adding a garage or pool to a house. People don’t want to pay much extra for them. Still, houses with a garage or pool usually sell faster than houses without them, so you might be willing to take a small loss in order to shorten your investment.

Some other examples of improving properties are:

• Developing a piece of raw land and selling the lots to builders
• Refurbishing historical buildings
• Buying a nice lot and building a house on it
• Adding onto an existing house
• Rezoning a property for a better (and higher-priced) use

Provide Other Ways to Control the Property

As landlords have discovered, there are more ways to make money in real estate than buying and selling properties. You can rent or lease properties to them, which gives them a measure of control over the property without buying it. There are some big benefits to this approach:

• Depending on the type of property, lenders require a 10-40% deposit for you to buy it. By renting, you can control of the property without investing so much upfront.
• Most lenders also have strict requirements on your credit score, income, and other financial ratios to loan you the money. By renting, you don’t have to meet all of their requirements.
• If you buy a house and then decide to move, you have to go through the time and expense of selling it. By renting, you can reduce your commitment to the property, making it easier for you to leave if things don’t go as planned.
• If you buy a house, you’re responsible for taxes and repairs. By renting, you avoid those liabilities.

In exchange for providing people those benefits (or value), you can charge a premium.

For example, if you buy a house and your interest payment is $600 a month, you might be able to rent the house for $800 or more a month, depending on the market. So, you collect $200 a month just for providing people with flexibility in how they control the property.

You see this approach everywhere. Even on less common investments like undeveloped land, many large companies prefer to sign a long-term lease of 40 years or longer instead of buying it. When the lease is over, you still own the land and (usually) everything they’ve built on it.

Once again, you might also receive other benefits besides monthly cash flow.

You might rent the property for just enough to make your principal and interest payment, allowing you to own the property debt-free after 15-30 years. If you’re in a high-growth market, you might also see substantial appreciation, making you lots of money when you decide to sell it later.

Here are more examples of providing other ways to control the property:

• Form a partnership with a developer, where you put up the property and they improve it, and then you split the profits
• Sell a potential buyer an option to buy your property, which you keep whether they buy it or not
• Setup a rent to own deal with a tenant, where you apply part of their rent to the purchase price in exchange for them paying full price for the home
• Lease a commercial building to an entrepreneur in exchange for part of their business revenue

Think of the Seller First… You Second

When most people think of “negotiation,” they conjure up images of a power struggle, each side fighting to receive the most benefit. And there’s some truth to it. As an investor, you want as good a deal as you can achieve, and as a seller, you want as much money as possible, as quickly as possible.

Except there’s one problem. Those pushy negotiation tactics aren’t effective, especially within the real estate industry. No one except the government can force someone to sell their property, and trying to browbeat them into it is generally counterproductive.

You’re much better off thinking of negotiation as a process of designing a solution. If you buy their property, what’s in it for them? The answer isn’t money, either. You need to figure out how the sale of the property is going to benefit their life. Ask questions like:

• This is a beautiful home. Why are you selling?
• After the sale, what are you going to do with the money?
• What made you decide on this price?

Once you’ve uncovered their motivations, then you can attempt to develop a solution. For example, you might find out that a family member just lost their job, and they can no longer afford the payments. They’re not as concerned about making money as getting rid of the liability. So, you figure out how much it would take to pay off their debt and offer them that.

There’s one condition, of course. It has to be a good deal for you too. In the above example, you would need some equity to make it work. You couldn’t buy the house for more than it was worth just to pay off their debt. So, once you’ve developed a solution for them, make sure it works for you.

Since there are multiple ways of creating value in the property, you don’t always have to buy the property for less than market value, either. For example, a seller might demand full price for their home but the house is on an exceptionally large lot in a good neighborhood. You might be able to pay them full price, subdivide the lot into three lots, and then sell them separately to make a nice profit.

They get full price. You make money. Everyone wins.

Find out What People Need and Get It for Them

Networking.

Everyone knows it’s important, but few people really understand how it works. Becoming a top-notch networker is not just about how many people you know — it’s about how much value you bring them.

For example, let’s say you want to network with the most successful real estate investor in your city. You could probably get in touch with them, but why would they pay attention to you? Why would they want to develop an ongoing relationship with you?

You’ve got to offer something they need. For example:

• If they’re hunting for their next investment, hunt down some great deals for them
• If they’re low on cash, introduce them to potential investors
• If they’re short on time, offer to pick up some of their workload

Whatever it is they need, do your best to bring it to them. Suddenly, you’ll become relevant… valuable. They’ll start accepting your phone calls or even calling you. The investor might even offer to pay you for helping solve their problems.

This is how I got started, and it worked like a charm. Instead of buying small houses like everyone else, I found out what other large investors needed and brought it to them in exchange for a percentage of ownership in the deal.

Generally, the bigger the problem you solve, the more money you will make. Solve a $1 million problem for another investor and they’ll gladly pay you $100,000 or more. Plus, you’ll make a lifelong friend.

Here are some of the ways you can bring value to people:

• Refer other investors to your accountant and attorney. Do enough of this and they’ll connect you with other successful people.
• If you find a good deal that you can’t take advantage of for some reason, refer it to another investor for a small fee. This is how I come across some of my best investments.
• Once you’re successful, offer free advice to people that are getting started. Some of them will be highly successful in a few years, and they’ll remember what you did for them.

To Make More Money, Add More Value

I’m often asked, “What’s the difference between a millionaire and a billionaire?” The answer: the amount of value they create.

For example, the real estate industry is full of investors that buy and sell single family homes, making five to six figures a year. They buy a house, fix it up, and sell it, each time adding a small amount of value to individual properties. The problem is, the business model doesn’t scale. Even the most efficient of these investors can only do 10-15 houses per month.

Now, there’s nothing wrong with this business model, but compare it to a developer like Donald Trump. His buildings serve as homes for thousands of the wealthiest people in the world, not to mention businesses that bring value to the lives of hundreds of thousands of customers. The last time I checked, he also employs over 20,000 people.

Who is contributing a greater amount of value to the marketplace? Clearly, it’s Trump. Just looking at the countless people that know his name, it’s easy to tell that he has directly or indirectly influenced millions of people worldwide. Regardless of what you think of him, it’s impossible to refute that he creates several thousand times more value than the average investor. And he’s paid proportionately.

If you want to make more money, look at the value you create:

• How many people live in homes you once owned?
• How have you increased the quality of life for the people that bought them?
• How much money do people make from your investments?

Then ask yourself, “How can I add more value?” You might:

• Systemize your model, so you can make more investments in the same amount of time
• Partner with other investors to do larger and more influential projects
• Teach other people how to invest, so they can create value as well

You might also need to change your identity. If you think of yourself as an investor, then you’re just here to make money, but if you think of yourself as a business owner that brings value to the lives of others through real estate. It’s a crucial distinction, and one that will make you a lot of money.