Interesting Times

When you buy investment property, you plan to make money. It doesn’t always work out the way you planned, but if you can stay with it, eventually the market will bail you out.

Some people try to make money by fixing up the property, or working to change the tenant profile and rents. Statistics, however, show that you rarely recover the value of the improvements you make. Changing the tenant profile is difficult work, and expensive, but it does add value to the property. Only you can determine whether your time and effort is worth the reward.

Others – most of us – plan to make money by selling in a rising market. When prices are going up and cap rates are going down, we all make money and feel like we’re smart. (As the proverb goes, “with money in your pocket, you are wise, and you are handsome, and you sing well, too.”) Sometimes, though, what we think is a rising market turns out to be a greater fool bust.

(The collapse of the housing market, by the way, is a classic example of trying to make money following the greater fool approach. Realtors kept telling their clients that it was ok to buy a house that was too expensive because it would be even more expensive next year. So the buyer relied on a greater fool coming along next year to bail him out. Eventually you always run out of greater fools.)

In my opinion, however, the best way to make money in real estate is to profit on the purchase - make money on the buy side. If you can buy the property for 20% less than market value, you know you’ll come out ahead, even with a credit crisis and recession and sinking home prices. You aren’t relying on interest rates, rent increases, fixing it up, a boom market, or the intervention of the government – you’ve already made your profit the day you closed escrow. You can still work to fix it up, and increase rents, and put on some touch up paint, but your real profit was locked in at the start, and the rest is just gravy.

That makes your pre-purchase research the most important part of your investment. Logically it would make sense to use the services of someone, a professional, who works in the real estate market all day, every day, to assist you – especially when it costs you nothing.

Every day, all I do is represent buyers of investment property, and try to help you make a successful purchase. I only get paid when you close on your purchase. I don’t represent sellers, so my loyalties are entirely with you, my client. And I truly believe that the purchase is the most important part of buying investment property.

In the next twelve months, we’re likely to see the country slump into a deep recession. Although I don’t expect commercial real estate to bust like the housing market, we are seeing prices decline, and cap rates increase, and that trend will continue. Occasionally, there will be distressed sellers and extraordinary buys. As John D. Rockefeller (and Baron Rothschild and lots of other smart investors) said, “the way to make money is to buy when blood is running in the streets.” I would say that describes our current situation.

I believe this is a very good time to be a buyer, especially for long term investors who lock in rents with solid tenants. If you would like to see what’s available in the market, and discuss how I can help you in your purchase, give me a call or send an email. We prepare a monthly list of all investment property in Northern Calfornia, broken down by type – office, industrial, shopping centers, apartments, retail. This is available free to principals, and can give you a good overview of the market, as well as point out the most attractive properties.