SUCCESSFUL REAL ESTATE STRATEGY
Everyone knows it is wise to buy at the “bottom” and sell at the “peak” of the market. But the problem is that it is quite difficult to be right on the target. The best way to overcome this difficulty is to study the cycle, monitor the market and actively search and compare the products. This will provide for the ability to compare and make sound judgements. The following suggestions may help in avoiding disastrous investment decisions and achieving superior investment returns.
1. OBJECTIVES: Not everybody makes money in real estate. One person’s gain can be another person’s loss. Set clear objectives: cash flow, capital appreciation, redevelopment profit, tax shelter, business use etc.
2. COMMITMENT: There is no easy way to make money in real estate. It takes time, creativity and hard work to be successful. Investors with vision and long term commitment always outperform the short sighted speculators that flip for short term gains.
3. LOCATION: Well located properties will perform well even in the tougher economic times and the over supplied market. Carefully review the property’s accessibility, visibility, competition, neighbourhood demographics and growth potential.
4. SITE: Conduct a comprehensive analysis on: soil condition, topography, environmental restrictions and available services.
5. BUILDING: Conduct a comprehensive physical analysis of the building. This will save trouble and money it might take to repair any structural defects. Zoning restrictions, existing lease covenants and design feasibility should be carefully checked if the property is purchased with the intention to redevelop.
6. DEMAND: Take a close look at the growth rates, trends in various economic indicators and types and sizes of products: population, employment, general economy, economic base, growing/declining industries and absorption.
7. SUPPLY: Know the existing inventory and the future supplies. Over-building problem drives down the rental rates and property values. Many builders get caught with empty buildings because they still build when the market is becoming saturated.
8. FINANCIAL ANALYSIS: Be realistic in making assumptions: (a) properly match rental and expense growth rates, (b) use realistic market rent, (c) allow for vacancies and collection losses, (d) allow for leasing costs, tenant improvements, rental concessions and capital expenditures, (e) conduct a lease by lease analysis since some leases may extend beyond the period of analysis, (f) the ending cap. rate should not be lower than the initial cap. rate, (g) use an appropriate discount rate, (h) allow for sale and closing costs.
10. CASH POSITION: Interest rates will fluctuate, unexpected capital expenditures will occur, tenants may go bankrupt and the space will be empty for six months or more. Prepare a contingency plan to inject cash into the project when unexpected events occur.
11. MOTIVATION: The investment should be market-driven not capital-driven. Buying a property due to excess cash on hand will result in a compromise of selecting a mediocre investment.