Double Digit Returns From Well Chosen, Well Managed Investments In Real Estate?

The operative word is investments in real estate. Not speculation. Investors usually do well, but no one can say it is easy. Some speculators do very well for some periods of time. So long as markets are going up. As the saying goes, in a high wind, even turkeys can fly.


Let's get real estate speculation out of the way, and get back to investment. In this discussion speculation means doing risky things without understanding the risks or probable outcomes. Like the people that buy some piece of property surplus to their own use, as the market is rising, sell it at a profit, and then invest the entire after tax proceeds in another property in the same market in the same cycle.


No tree grows until it reaches the sun. So real estate does not go up in price forever, without any kind of market adjustment. The implied assumption underlying the above description is that these buyers believe they have found the exception to the law of gravity. That their properties will continue to go up in price.


However, they were not even true to this implied assumption. Why sell the first piece of real estate, incur a tax liability, and then reinvest the entire amount in a like property in the same market? Why not just hold on to the first property, knowing the market would ultimately correct? And the speculator would have had an added cushion against the correcting market in the amount of the tax paid. I can speak with some authority on this subject, as I have made that mistake.


A speculator is one who becomes involved in investing in some development project which has not been presold, or preleased. There the speculator is betting on continuing strength in the sales price or lease rates through the construction phase, and until the project is sold or leased. He is betting that construction costs will remain constant, and that the estimates for construction costs were accurate. He is betting on the direction of interest rates. He is betting on the character and ability of the developer.


A chain of events with uncertain outcomes, and over which he has no control, all have to work out right in order for him to make the expected return on this real estate adventure. And they all rarely work together as planned. So the investor will earn an inferior return, or lose much of his money. Strangely enough the developer/promoter rarely participates in the loss. Perhaps that is why Donald Trump makes much of his money through various development fees, and renting the use of his well publicized name to a project. I have good reason for knowing this story well, as I have lost money doing this.


Making money investing in real estate is simple but difficult. It is simple because almost anybody can do it, if they just don't try to get fancy or creative. It is as simple as buying a piece of real estate with sufficient credit worthy tenants to fill it, and being prudent in the use of debt. By that I mean without financing it with 100% debt. Once an investor owns real estate in that category, having bought it for a reasonable multiple of cash flow, he merely needs to wait.


Over time there is likely to be some upward pressure on rent, causing the cash flow to increase, and the return to improve. Something initially purchased to yield in the single digit range can soon be providing a double digit return. And that is after making the mortgage payments. So ultimately the building pays for itself, while also providing spendable cash. All for a one time investment. Not complicated, but not very exciting either.


That is the oversimplified version what a prospective buyer might do with his capital rather than buy your business. However, remember I said it was simple, but difficult. The difficult part is that many people lack the patience and tenacity to merely hold the building for appreciation. And then at some appropriate time refinance, and use the proceeds to buy another like property. But very conservatively.


The fact that this type of venture, true investment is boring for many people. They crave some type of activity, and this doesn't provide it. So those craving some type of activity, are more likely candidates to buy your business than to be owners of commercial investment property.


Your challenge and opportunity is to present your business as being almost as risk free as conservative commercial real estate. Requiring some additional effort, but providing superior returns in exchange for that effort. Someone wanting some level of action may also become attracted to the nature of the business itself, including whatever opportunities it can provide as a way of meeting interesting people. Is this benefit inherent in your business, and if not, can you develop it?


You may wish to learn more about investing in commercial real estate, as a place to employ your capital profitably after you sell your business. Check back for one or more recommended sources of information. Bookmark this page for easy reference.


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