In real estate, disciplined investing starts with buying right. Profit can be created by finding properties in the right location, at the right time, but, most importantly, at the right price.
After all, the price you pay for a property is the foundation of its investment success. In fact, by going the extra mile you can avoid overpaying for a property by adhering to a set of guidelines.
This will not only filter out mediocre investment opportunities, but help assure projected returns are met or exceeded. This process is commonly known as performing active due diligence.
So, just how do you buy it right?
Know what you want to buy
Focus on underperforming properties in good-to-superior physical condition with little to no deferred maintenance.
Preferred properties have the following criteria:
– are undervalued;
– have untapped income potential in the form of a favourable gap between in-place rents and market rents;
– offer the ability to make improvements or renovate to increase value;
– have stable tenant bases;
– and have healthy turnover and low/tightening vacancy rates.
Know how to buy
It’s a promising idea to build quality relationships with private property owners as once they are ready to sell their properties you may be the one they contact first.
This active acquisition strategy could result in an opportunity to acquire properties off-market, avoiding the bid-up process that tends to occur when properties are publicly listed.
Know how to effectively manage your investment
Once a building has been acquired, an active value-added property management approach helps to limit downside risk while providing unlimited upside potential.
This strategy allows for the unlocking of untapped value through targeted improvement plans that enhance the overall tenant experience, which in turn generates higher rents and increases property values.
Active management can focus on maximizing income and creating a stable stream of cash flow from properties by:
– performing regular market analysis to ensure rent revenue is maximized;
– conducting expense-reduction initiatives (for example, swapping out your lightbulbs for LED lighting);
– ensuring ongoing operational efficiency;
– increasing non-rent revenue on amenities such as parking and utilities;
– and making physical improvements or additions to increase rental revenue.
We have seen firsthand that improving customer service and a property’s appearance and condition can command excellent increases in rents.
Examples of such improvements might be renovating kitchens and bathrooms in apartments, improving curb appeal on retail properties or developing excess lands to generate more income.
Although a “buying right” acquisition strategy is an essential part of creating value, it’s only part of the recipe for successful real estate investing.
An active management approach is the other key ingredient to success.