Highest and Best Use, part 2

My philosophy is pretty simple. You want to build wealth you don't have to steal the property.

There is a lot of under-utilized real estate out there. It is NOT being used at it's HIGHEST and BEST USE.

Pay market value for it in its current use and enhance its value by changing its use.

That big strawberry field about a block south of Disneyland is an obvious example. For over 50 years that property has not been producing the kind of income it could have if it had been employed at its highest and best use. Can you imagine the millions of dollars left on the ground because there wasn't a hotel or something like that on that spot?

Ok that's a pretty extreme example, but I just wanted to make a point. All real estate is worth more when it is at its highest and best use.

My wealth building strategy is simple. Find an under-utilized property. Enhance its value by up-grading its use.

The simplest example I can think of is to buy a 1000 square foot house in a neighborhood of 2000 square foot houses.

Look for an area that "appraises" at $300 per square foot or higher.

Add on an additional 1000 square feet to the house. If you manage it correctly this should cost you between $80 and $100 per square foot or $80,000 to $100,000 for the addition.

Simple math will show you that you have enhanced your equity by $300,000 or more for this $80-  to $100,000.

Most rehabbers miss this simple concept. More value is added by increasing the size than by putting in expensive kitchens and baths, even though they are also increasing the use by up-grading functional obsolescence.

A single family residence (SFR) in an area that allows multi-family (APTs) is another obvious candidate for use enhancement. Build a second unit on the property or maybe 6 additional units on the property. It all depends on zoning and density requirements. We have seen cases where existing parcels have standing duplexes while the density requirements would allow up to 10 units.

Another easy way to create equity is to do a simple lot split. Look for over-sized lots. A simple lot split is generally easier than a subdivision. Check with your city on their requirements.

I will get into more use enhancements next time. But this should get you started.