If you missed the resurgence of Culver City or the renaissance of Silver Lake, you’re not alone. Most real estate investors fail to spot burgeoning investment opportunities because they take an old-school approach to the analysis and planning process.
Rather than creating a forward-looking strategic plan to deal with problems or seize investment opportunities as they arise, the laggards are blindsided by market changes or financial setbacks because they treat real estate like an asset instead of employing the successful strategies that apply to other financial investments.
For example, having a proactive exit strategy can help you contend with regulatory changes such as rent control, depreciating assets, or the next boom-and-bust real estate cycle much as a stop-loss order protects shareholders from a decline in stock prices. Deciding those trigger points and creating a liquidation strategy in advance can reduce losses and prevent knee-jerk decisions.
The way I see it, innovation doesn’t result from the adoption of new technologies, but the foresight to plan ahead and the agility to pounce as investment prospects appear on the horizon.
Although no one can predict the future, considering these four elements can help you anticipate a variety of realistic scenarios and develop an innovative strategy to maximize the return on your real estate investments.
FRAMEWORK FOR INNOVATIVE INVESTING
Why reduce profits by granting concessions to big box retailers when you can turn that aging shopping center into a charter school or long-term care facility for seniors? Today’s real estate investor needs to identify opportunities to restructure old properties in ways that satisfy unmet needs and garner higher capitalization rate returns through preservation of the underlying structure.
Across the country, old motels are being converted into hospice care centers or specialized medical care facilities, while vacant office buildings are being turned into student housing, storage facilities, and flexible live/work spaces. These success stories are the result of cutting edge repositioning of old inventory. Without innovation and foresight, your commercial real estate inventory will become inefficient. Tip: Preserve the past while planning for the future. Adapt old buildings for new uses.
Forget those preconceptions about exclusive zip codes and emerging global economies. Investors need to consider macroeconomic forces, velocities, and external factors that influence appreciation and property values within a specific geographic region. For example, although most investors believe that China’s economy is booming, its real estate market has peaked and property values are declining. Meanwhile, the increased use of fracking has been an economic boon for many states including Nebraska, which has experienced significant price increases in commercial real estate. Tip: Don’t rely on gut instinct, conduct a blind analysis of demographics and relevant data to identify choice locations for real estate deals.
That low interest rate or financing strategy may seem great today, but how will those terms impact your long-term profit goals, equity, and cash flow or exit strategy? Will you be able to pay deferred capital gain taxes when you finally cash-out after consummating a series of 1031 exchanges? Will you be able to service debt and still come up with the cash to make major repairs or repurpose an existing structure if the economy craters?
Consider the future by forecasting the impact of your financing decisions on profits and capital returns using most likely, best case and worst case scenarios over the next five to 10 years. Tip: Create a multi-year plan and budget and adequate reserves to mitigate risk and optimize each situation and revise them annually.
Collaboration and Teamwork
Surrounding yourself with a team of creative and capable lenders, lawyers, accountants, appraisers, real estate brokers and property managers can help you manage a portfolio of diverse assets, identify creative financing vehicles, reduce risk or improve operations and facilities management at various properties.
Draft a winning team by selecting professionals who provide a much-needed injection of expertise and a track record of innovation. A property manager should find ways to reduce costs by conducting a utility audit for instance, while an acquisition analyst should conduct a sensitivity analysis to help you assess the impact of a potential deal on cash flow, rate of return, and profitability.
Most importantly, your investment team should be aligned with your goals and your expectations and bring a variety of perspectives to the table. Tip: The right team can not only help you see the broader picture but help you maintain a steady cash flow and income stream as your real estate investments grow.