Entrepreneurial Growth
Many investors routinely search for the so-called "value added" property. Other names for this prize include "under-managed property", "turnaround opportunity" or "fixer-upper". The essence of this street lingo is that the investor wants to add entrepreneurial effort, making improvements in the early stage of ownership and building "sweat equity" throught the addition of his labor.
Modeling future increase in value is as much an art as a science. Beyond predicting the change in rents, values and interest rates, one must also predict the relationship between these. Keeping that many balls in the air often results in exasperation and leads to assuming a simple annual growth rate, known as monotonic growth, such as perhaps 4% per year.
Using a modified logistic growth function one can make assumptions about the owner's active involvement in the early years of ownership, following that with a period of stabilized "normal" appreciation. Chapter 4 of Private Real Estate Investments describes such a situation and the example below produces the graph that describes the path of value assuming two different owners, each with different levels of entrepreneurial ability, reflecting their different outcomes at the end of 30 months.
