A key characteristic of a real estate investor is to have foresight. They should be able to see past the obvious and make their decisions. Anybody can make an ordinary choice and miss out on something which has a deeper value than the normal. A common real estate investor might miss out on the valuable piece of real estate, just because they couldn’t think out of the box. So it is obvious there are many ways to conduct a deal in the realty business. All you need to do is assess the value of the property and chalk out what kind of options you have.
Let us assume that you are a real estate investor who finds a premium distress property in a marketable neighbourhood. The price offered is great, something which will allow you to earn a healthy profit when you eventually sell it. It requires some repair and renovation but this piece of realty has some potential and can yield a healthy profit. You plan to do the necessary repairs and put it on sale for prospective buyers. You obviously plan to sell it off to somebody who can pay your asking price for this property. But ask yourself? Is it the only alternative? Is this approach even correct or not?
There are a lot of other options in front of you. Do you sell the entire house for less cash or you do the repairs, and sell the property piece-by-piece and sell it for a value which is around two or three-fold the original price. A smart real estate investor will consider many options. He could close on the deal, refurbish the entire property and market it to home buyers. Or he could even do a full redevelopment of the property and sell it. He could even partner with another investor before selling. So you see the entire range of options that a real estate investor has in front of him.
The Best Course Of Actions Depends On Many Factors
So how do we at Gupta & Sen advise real estate investors on approaching a property? The best way to do it is by considering a few factors:
- Do you have the necessary resources to tackle the piece of property as a redevelopment or renovation project?
This involves time, money and energy. If you even have two of the three mentioned resources, then you are good to go. And it is sensible to sell the property as it is because renovating is time-consuming and expensive initially. You also need to include in a good deal.
- Would this property become a great rental? Does it have the necessary potential?
Would it be sensible to rent out on a particular property? If you can earn a 12% profit by selling it, then it is good. But wait, there is a catch involved. You have to pay the tax and insurance and all the other costs involved. So one has to consider ROI on the property also. If both the checkboxes are ticked, then you have made a great deal. Otherwise, impatience will cost everyone dearly.
- Would holding this property for some time yield greater return than in the present time?
In a market that is bullish, this makes sense. Any appreciation in the property prices will give you a good profit. It certainly is logical to wait patiently for making a long term capital gain in place of a short term capital gain.
- Can it be made into an owner finance deal?
Once you graduate to the next level, then you will get all sorts of deals. It is good to consider owner financing. That could get you a lot of discounted payoffs, note renegotiation and substitution of collaterals. This can be converted to greater deals later on, but one has to keep in mind that there are risks involved.
- Is the deal good enough to bring a financial partner in the deal and share the profit?
Is it sensible enough to share a chunk of the profit by dividing the risk with other partners? You can make a partnership deal, but one has to make sure you yourself are not solely on the hook in any of the crucial matters.
You need to assess what strategy you are going to use in a particular decision. All investors have to go through this dilemma. Most of them are blinded by the money involved in the deal. Don’t allow that to happen to you. Avoid the lure of the money and you will be just fine!
Avoid The Monkey Trap At All Costs
You surely have heard of the monkey trap story? A monkey is shown a jar of peanuts and it inserts its hand into it for taking out a handful of large pieces of fruits. The monkey is greedy and the hole of the jar is way too narrow to allow a fist full of peanuts to pass through. The monkey tries hard to draw away its hand but in vain. It can’t get its hand out. Eventually, it lets go off of all the peanuts and has nothing in hand.
What you need to learn from the story is that the pieces of property are the fruits and you have to draw them out of the jar. Just don’t try to be the greedy monkey in this story. Weigh in the pros and cons of purchasing a property and the way you wish to sell it off. If it is a big liability to your profits and freedom, then it is better to walk away by making a small profit.
Make Strategic Decisions About The Property
Whenever you are making a deal, just ask yourself these three questions before purchasing a property –
Do You Have Enough Money For Purchasing The Property?
Do you have the requisite capital for making a purchase? If not, then it is better to walk away from it. Why? That’s because if you are taking a bank loan, then it could be a big risk for you. If you complete the deal with the help of a bank loan, then this could be a sore pain in the neck. The reason behind this is that the time of recovery is extremely long. And if you do not make the money, you will never be able to return it.
Will You Redevelop The Property Or Do You Have A Team To Do It For You?
There are many investors who want to redevelop a property but do not know how to do it. They hire subcontractors who can finish the job for them. If the team of subcontractors is good they will try to finish the job well, but obviously, such contractors are always in high demand. They might eventually not make time for it. But if the team of subcontractors is not up to the mark, then the whole project might falter which will set you back even further.
Do You Really Want To Redevelop A Property?
If you do not want to redevelop a property, then do not go for it. It is unwise to do it if you are not committed to it. There must be some valid reason for it. Maybe it isn’t the way you are accustomed to do things in life. In the meantime, you could do 10 other deals and earn more money. Nobody can say how an apple will turn out to be. It is a gamble. You could avoid the stress of redevelopment and earn the same amount of money by buying and selling properties and be done with it.