The rubber has finally hit the road. After a lot of researching, speaking with agents, and working with mortgage brokers, I finally touched down in Greensboro. Armed with financial models, a few perspective properties, and a lot of appointments, I set off to find a good investment. Today, I want to talk briefly about what kind of property makes a good investment.
Keep in mind that a good investment for me may not be a good investment for you. Before you begin to look for your good investment, have a good understanding of your goals, timeframe, risk tolerance, and expertise. These three aspects make up the first step to finding a good investment. Investing should always be goal oriented. Goals help you focus your investing. If your goal is to become a millionaire in a year (not recommended) then your investment strategy needs to be very aggressively focused on leverage and Net Present Value (NPV). On the other hand, if you want to save for your child’s college fund or your retirement (Thanks Jeff), you may want properties that generate consistent cash flow in markets with a lot of potential buyers (easy exit and entry).
Additionally, timeframe and risk tolerance come into play as well. One person might be a skydiving, fast car driving risk loving young man, while another might be a little old lady looking to supplement her pension. A good investment will clearly be different to both of these individuals. While this is nothing new, it is surprising how many people do not truly understand the risk behind investments. Many people look at real estate investments as very low risk. Perhaps if you are buying core buildings in a major market, you might be able to be fairly certain of your cash flow. However, to capture those certain cash flows investors pay a significant premium up front in the form of a very low cap rate.
Besides meeting the above requirements, good investments are not obvious. Good investment properties require looking at a property and seeing something different than 90% of the investors who would normally look at that property. Why do I say this? Let me give you a simple example. If you were in a market where all the houses were selling for $100,000 and all of a sudden some clueless person decided to list their house at $80,000, how long do you think that house would stay on the market? Simple answer, as long as it takes an agent to write and fax a contract. However, lets take the same example and assume now the house is listed for $60,000, has broken windows, a leaky roof, no doors, and an overgrown lawn. Even though that’s only about $20,000 worth of work, the house might sit on the market for months until some savvy investor with a vision came to make the purchase. Keep in mind the hotter the market, the bigger investors’ visions become. There are tons of other examples like this. The essence of rehabbing and repositioning buildings is good vision.
Last, and probably the most controversial assertion I will make here, good investments make sense before financing. Financing is a great tool to improve returns, but creative financing can be very risky. Save the most aggressive investors, real estate deals should be profitable before financing because of the uncertainty of the real estate market. Even with Non-Recourse loans, a buyer still puts their credit (with at least one institution), relationship, and reputation at risk when pushing the financing envelope. Financing is one of the many tools in the investor arsenal, but it should not be the first life line an investor reaches for when the pickings are slim.Related posts: