Part 4 of our Property Investment Series deals with property characteristics and what to look for when you buy investment property.
As they say, the three most important factors in real estate is location, location, and location. This is true to a certain extent, but depending on your plan and strategy when your buying investment property, other factors can be substituted in for at least one of those slots. Location of a property can impact an investment greatly. For commercial investments, a good location means something different than a residential investment. A land investment can have the same or different definition of desirable location depending on its use. I’ll focus on residential for now with an example.
County lines, school district boundaries, water and gas hookups, and zoning restrictions all have a way of directly impacting price and value of an investment. The market determines the price, but the value lies within the potential of the property to produce income or appreciate. These boundary lines are invisible, but they will be seen quite glaringly on your income statements and balance sheets. They make all the difference in the world when determining whether a property fits into your strategy and plan. Market research and due diligence will be your most important asset when previewing properties and spotting a potential deal. I’ll focus on “Knowing your market” in a later article.
Determining the value of a property for your use is essential when making an investment. You never want to overpay for an investment. You make your money on a real estate investment on the purchase. You should not factor in future potential or let emotions play a role in the price you are willing to pay. These factors do not add value and muddy the water when trying to make clear rational decisions. You will have to spend money on the upgrades or development of the property to realize the potential, so paying more up front for this leaves you paying twice for the same thing.
Price vs Value is a commonly misunderstood topic. Seth Klarman differentiates here: “In capital markets, price is set by the most panicked seller at the end of a trading day; value, which is determined by cash flows and assets, is not. This is both the challenge and the opportunity of investing: to carefully sift through the markets to find the greatest divergence between price and value, and to concurrently avoid the extreme emotions of the crowd and, indeed, to take a stand against them.”
Part 1: Investment Series
Part 2: The Business Plan
Part 3: Strategy
