06 Aug

Why has real estate ownership been SO IMPORTANT to the human race?

If you have been in real estate for some time, you probably have heard Mark Twain’s opinion, “Buy land, they’re not making it anymore.”

REAL ESTATE IS A TANGIBLE ASSET. You can touch it, see it, build on it, enhance it and manage it. Renters provide a return “on” and “of” the investment.

Return on investment is a profitability measure, calculated by taking the profit and dividing it by the cost or value of the asset. The return of the investment is the rate at which the cost or value of the asset is returned to the owner. The COMBINATION of return on and of the investment provides the basis for determining investment-real-estate-purchase decisions.

So, let’s assume you have already purchased a real estate investment and you want to be the next millionaire. The local market is in a stability stage (i.e no measurable changes in values). Few listings on the market and foreclosures are non-existent. Vacancies are staying around 8%.

There could be other options:

  1. Is there land to build new product?

    a. The opportunity to build a real estate product where cost plus land pricing is below finished product provides that upfront equity you are looking for.

  2. Are there borrowers that need financing help?

    a. Second mortgages provide yields higher than first mortgages and can provide the returns you are looking for.

  3. Are there renovation opportunities?

    a. Not all tenants and owners maintain properties equally. Looking for dilapidated real estate and bringing those assets to market condition can provide that needed equity, again, that you are looking for.

Expand your coverage.

a. Real estate cycles in this global economy tend to have excess downsides when markets decline.

  1. Look for assets that can produce pricing premiums.

    a. Do one-story homes sell for more than two-story homes? Do four-bedroom homes sell for a premium versus three-bedroom homes of the same size? Upgrades in bathrooms and kitchens can provide returns in excess of cost.

This research can allow investors to purchase real estate at below market rates and build immediate equity.

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