Real Estate Investing Fundamentals in Tough Economic Times

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In these tough economic times it is back to fundamentals when contemplating real estate investing. Whether investing in commercial properties, defined as office, retail, hotel and industrial property, or in multi-family residential property, it is a different time than in recent past. For the experienced investor it’s time to get back to fundamental principles and understand not only the property market, but just as critical, understanding the capital market in order to achieve some level of success. This is even more important for the beginning crowdfunding real estate platforms hong kong estate investor.

During the heydays of 2002 through the first half of 2006, capital was plentiful for all property types. Most property types were easily financed with easy terms. With amble money looking for opportunities, lenders opened the spigot and investors could tap into a variety of sources to finance an acquisition. The days of lenders lending based on future potential income of the property and appreciation is gone. As a result, most buyers during this time period wound up paying a premium for their acquisition in anticipation of continued property values appreciating at a double digit pace as had been the case during much of this time.

We are in a totally different environment today. Today it is more important than ever to get back to fundamentals. For investors contemplating an acquisition, there are several property level as well finance level considerations and calculations one needs to perform to assist in properly evaluating a purchase. Qualified and experienced professionals can be invaluable in this area to help insure success.

A necessary first step is to identify goals for each property as it relates to ownership, property operations and management, and an eventual exit strategy. The following summary outlines the major considerations that are important to a successful investing program, whether at the beginner stage or at the level of the more seasoned real estate investor.

Property Types: Different property types require different property management and operating considerations as well as have different income and expense profiles. An example is a full-service office building where the owner pays all building operating expenses and up keep with no pass-through to the user. Granted, the rental rate the office user pays reflects the operating expenses, however, there may be expense stops in the leases prohibiting any amount over a certain dollar amount per square foot that can be passed-on to the user of the space. In that case, the owner will have to absorb the amount over the stop amount of the increase in expenses. Conversely, a retail shopping center owner typically will pass-on all property expenses to the user without offsets or expense stops. Therefore, the retail center operating expenses will typically be less of an expense burden for the retail owner than for the office building owner due to the contractual (lease) ability to pass-on all expenses to the tenants. This is just one major consideration when contemplating investing in the office building versus the retail center example used here. Different property types will experience different vacancy rates, rental rates and expense ratios and will be market driven. All these factors are important when evaluating a purchase. Lenders also rely on historic market metrics and property operating profiles when evaluating their underwriting criteria as a bases for how much they will loan, what level of income is required to meet the annual debt service on the loan, to many other property operating, market and management factors. Different property types have different operating and expense as well financing considerations that must be thoroughly investigated to achieve success.

 

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