In this fourth and final installment of our series on developing your personal investment strategy and putting it into action, we finally get to the place where most people start: the property.
In the studio perfectly poised for profound and prolific pontification:
- Your practically perfect host, Robert Helms
- His immensely imperfect co-host, Russell Gray
- The Godfather of Real Estate, Bob Helms
As we pointed out in our first installment, there are no problem properties…only problem ownerships.
The keys to picking a property for you are:
- Being clear about your personal investment philosophy
- Choosing a market (geographic, demographic and product type) that is well positioned to perform towards your predetermined investment objectives
- Enlisting the help of a properly qualified team
It sounds simple, but each step requires a lot of work.
The good news is that if you lay the proper foundation, picking the right property is MUCH easier!
With that said, there’s still some work to do to be sure the property you pick will fit properly into your portfolio.
For starters, once your team has recommended a property, you need to evaluate their recommendation.
Usually, you’ll get some type of property profile which provides a basic description, location and financials.
Assuming the property type fits your objectives, you need to understand the specific micro-location.
It’s fine to say, “I like the economy and demographics of single-family homes in Atlanta, Georgia.” But when it comes to actually picking a property, you’ll want to be much more granular.
How’s the neighborhood? Who are the customers (tenants)? What’s the micro-trend for demand, economics, demographics? Are there any local ordinances or projects, present or pending, which may affect desirability, utility and potential profit opportunities?
For example, let’s say you pick a property in a nice quiet neighborhood, and your customers are retired seniors.
Then you find out a new freeway, nightclub or sporting venue is planned. The neighborhood’s about to get a lot louder…which may drive your customers away.
You get the idea. The point is to find out about the neighborhood factors which might impact the specific property.
Next, what is the actual condition of the subject property?
In most professionally represented transaction, there will be a host of disclosures and inspections. Read them! Ask questions.
You’re not looking for reasons NOT to do the deal. So don’t major in the minors. But do keep an eye out for your “deal killers”…items which are so important to you, you’d walk away at almost any price.
You’re also looking for “levers”…items over which the seller should probably be willing to sweeten the deal.
Look for hidden opportunities in the condition or structure of the property. These are things you believe you could change to improve the value of the property, such as adding covered parking, storage, individual utility meters, etc.
If your personal investment strategy revolved around “value add”, then hidden opportunities will be really important to you.
Now it’s time to dig into the financials.
What you’ll usually get is a “pro forma”, which we jokingly refer to as Latin for “made up”.
So if the numbers look good at first glance, it’s important to go through them line by line to look for anomalies and opportunities.
If you don’t happen to be familiar with a particular market or product type, one of your best allies in reviewing the financials is a local mortgage broker who specializes in the type of property you’re looking at.
Another good source for a second set of eyes is an experienced property manager. These guys will know what the REAL market rent is. They’ll be able to look at a lot of the expense items and know if they’re in spitting distance of reality.
The bottom line is this…
When it comes to picking the perfect property for your portfolio, it needs to fit your philosophy, float in a market with dynamics likely to push the kind of financial performance you’re after (both today and into the future); be run by a team who has your back, understands your goals and values, and are well qualified to do the work; and you need to see CLEARLY what you are really buying in terms of condition, micro-location and customer base.
The time you spend laying a great foundation will pay enormous dividends over the term of your investing career.
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