The intense competition in today’s real estate market means great news for those who own properties, but a huge hurdle for potential buyers. The hyper-growth of the multi-family real estate market, which continues to show exceptional performance even in these difficult economic times, has created a feeding frenzy among investors.
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Frankly, for every worthwhile property available, a waiting list of potential buyers is ready and willing to take more risk for less reward than ever before.
Yet when the fundamentals of real estate investing are compromised or no longer apply, buying real estate is more like a game than an investment.
Contents Pin up
1. Hidden value in a potential investment property
2. What is it?
3. What was it?
4. What can it be?
Hidden value in a potential investment property
Regardless of the intense competition, it is essential to conduct a field investigation to avoid making a rash decision. Now more than ever, you need to find a way to uncover the hidden value of a potential investment property that others are passing by.
Take the time to find out what’s really behind the seller’s motivation to sell, use street knowledge to find out if it’s a wise investment, and think outside the box to figure out where to find hidden value. To do this, prospective buyers must ask themselves, answer and analyze the following three questions:
If you were the director of acquisitions for a real estate company, would you tell your boss that you think a certain property is a good investment because it is well located, looks in good condition, that the rents are below market and that it sells for only $50,000 a unit? If the answer is yes, you won’t last long at your job. Understanding what you are actually buying requires extensive research, ranging from performing diagnostic tests by third-party experts to performing several field surveys. Choose to have a property condition report prepared for you. Such reports generally give an opinion on the condition of various building components and systems. Never take the seller’s or broker’s word for the condition of the property.
Put on your detective hat and start interviewing. Try to identify and interview previous owners and occupants of the property to identify historical uses of the property. Even interviewing owners and operators of adjacent businesses can be a good source of information. Historical information about interior improvements and/or renovations can give you the opportunity to uncover hidden, untapped value. If a restaurant and/or bar occupied the property, there may be hidden value to be recovered. For example, if a bar once operated on the property, this could prove useful in obtaining a liquor license which could be grandfathered.
First, find out about potential constraints by reviewing the certificate of occupancy and title report. These can reveal if there are any use or other restrictions on the property. Then ask yourself, where do you think the finances and property value will be in five years? Consider different factors, including the possibility of significantly increasing rent and reducing operating expenses, or increasing the amount of leasable square footage. In most cases, the greatest increase in value can be achieved when existing zoning allows for greater density or additional construction on the property. Or, if a municipality makes a change to allow more density on a site, it effectively gives the owner a winning “concrete lotto ticket”.
Nowadays, we want to succeed right away with as little effort as possible. But before making any real estate investment decision, be sure to answer the three essential questions that allow you to understand how and why a property may rise dramatically in value – or not.
About the Author
Sam Liebman is founder and CEO of WealthWay Equity Group LLC, a New York-based private equity and real estate development firm. He has held substantial interests in more than 70 properties over the past 30 years, ranging from multi-family communities, office buildings and shopping malls, to the construction of a 21-story luxury condominium complex in Manhattan. He is also CEO of Rolling Cash Realty, Inc., a property management company, as well as a partner of Tepper & Co., a licensed accounting firm. His new book is Harvard Can’t Teach What You Learn on the Streets: The Street Success Guide to Building Wealth Through Multifamily Real Estate (Made for Success Publishing, January 11, 2022). Learn more at samliebman.com.
Updated on February 15, 2022 at 4:03 p.m.
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