Look beyond clichés and popular sayings for CRE wisdom.
When people talk about real estate, they often share conventional wisdom that is used to explain why a property is or is not a successful investment or development opportunity. However, many of the sayings applied to real estate only scratch the surface of what an investor or property owner needs to know. And some of them are simply wrong.
Here are a few phrases and sayings our team hears regularly that aren’t always helpful in making real estate decisions.
Location, Location, Location
By far, the most popular saying is that real estate is all about location, location, location. This is true to a point, but is too simplistic. Location is a big factor in the success of any property, but location alone cannot make every property worth the investment and pursuit costs. Our team has evaluated many opportunities in seemingly perfect locations. However, we advised our clients against purchasing because of other factors, including, but not limited to, rents, supply, demographics, access, zoning restrictions and entitlement process, height limitations, setbacks, future development constraints and more.
The location is the beginning. It’s what gets you there. From that point working through the checklist of requirements to insulate against current and future risks is a meticulous process.
If You Build It, They Will Come.
The line, “If you build it, they will come,” from the classic film “Field of Dreams” is often used to explain the likely success of a big, shiny development. But it’s not a great foundation for ensuring that your investment is going to be successful. A beautiful, modern new condo tower development that isn’t convenient to jobs or amenities that will attract owners or tenants may become an empty monument to a poor investment decision.
There needs to be a story. An inspiration for people to need to live there and to serve a demand that is not being adequately met. Developers are smart. They will do their homework and when they find a property they like, they need to know that selling the units in this location, at a certain price, controlled by the market demand and their all in costs for the project is prudent and safely justified.
“Buy Land, They’re Not Making It Anymore.”
Mark Twain was right when he advised people to “Buy land, they’re not making it anymore.” This quote is famous and makes you feel good just saying it. However, it’s another potential pitfall and is based on assumptions rather than good logic and research.
Acquiring land with an investment strategy timeline, a good story, and an exit strategy based on fundamentals can be solid. Is the land near a new master plan community or at a lighted intersection where new development is coming in? Does the surrounding ‘use’ analysis provide strong rent figures and demand drivers? Can you buy it at a low basis because of an issue that you can solve thereby increasing the development opportunity and value? Can you assemble several parcels over time and make the overall land configuration and location a new development opportunity for a ‘higher and better use’?
This is different than buying land because it may go up in value sometime in the future or you think somebody will want to build a shopping center one day. A prudent in depth market analysis covering a multitude of variables is required to ensure you can monetize your land acquisition by selling it or developing it yourself in a time horizon that is within your risk tolerance.
“Buy Low, Sell High”
This is a great rule of thumb, but unfortunately real restate is not that simple. Many factors come into play that can make a “buy low” mentality dangerous if all the other factors are not taken into consideration. Anyone can buy land, or land with cash flowing improvements for a low price, but sometimes what makes it low to begin with also means your exit strategy is non-existent or you’re tied to unforeseen future risks.
Real estate is about a yield and yield is impacted by time, opportunities and opportunity costs of other investments. The closer you can position your equity, debt and time with an upside opportunity in real estate the better. A property in a great location, surrounded by jobs, good demographics, retail amenities, grocery stores, shopping and other new developments, is more likely to have a ‘use’ enhancement opportunity, better rents, and eventually a better exit strategy. The ‘key’ is to balance your time horizon with your current and future yield objectives and study the market relentlessly to mitigate risks.