Identifying Properties With Significant Profit PotentialUsually, properties with significant value-increase potential are located in neighborhoods and submarkets with relatively low vacancy rates and are not threatened by the development of incompatible uses, such as heavy industrial uses, or other developments that will undermine their value. Properties in markets and submarkets with high vacancies are risky and should be viewed with extreme caution because they are prone to market rent declines, which will eventually result in NOI and value declines. This is not to exclude build-ings with high vacancies in submarkets where the average vacancy rate is low. In fact, such properties may have significant profit potential, if their higher vacancy is due to mismanagement, rather than property characteristics that make it less attractive. It is obvious from this discussion that the potential for achieving high profits in real estate depends on how well one can identify properties with good prospects for strong value increases within reasonable time. Investors, seeking to enhance their ability to identify properties with significant profit potential, need to understand very well the price determination mechanism, the broader principles of property value and rent increases, and the specific factors that trigger such increases. The purpose of the material that follows is to help the reader develop such an understanding and acquire a solid background for inspiration and guidance when searching for real estate investment opportunities with significant profit potential. For this reason, I will discuss in this and following chapters the laws that regulate the functioning of the real estate market, the mechanism by which property prices and rents are determined, and the specific factors that trigger rent and property value increases for different property types. It should be emphasized that the clues and information provided for identifying properties that may have significant profit potential are no substitute for the due diligence that needs to be carried out in evaluating a specific property. The ideal process of assessing and quantifying prospects for rent and therefore, property value increases, involves econometric modeling and empirical analysis at the broader market level and the submarket level. Furthermore, when the conclusions from such analyses are applied to a specific property they need to be adjusted according to its characteristics and peculiarities, as well as its advantages and disadvantages. Some professional firms produce econometric forecasts of expected rent movements in the nation’s major real estate markets. Such forecasts can be quite useful to investors aggressively looking for properties with signficant profit potential. When applying such forecasts to a specific property, one needs to be very careful, since its income will mostly depend on existing leases—in particular, the quoted contract rate, adjustment terms, and rollover schedule-rather than market rents. Thus, the path of market rents will influence a property’s income, depending on how many leases expire, how many are renewed, and how many are replaced by new leases.
Do you have an interesting comment on this article? Share it! Our visitors would love to read it!
|
