Six Critical Success Factors for Investment in Real Estate
It's a rare week that I don't get at least one phone call or visit from someone who is considering investing in real estate. Now I don't profess to be an expert in this aspect of the business as I am not an active player myself. Even though there has been a number of times when I have recognized an opportunity for either short term or long term financial gain, fundamentally I don't believe in competing against my clients. I guess I value my independence too much, and strive to be as fair and impartial as I can be. I do reserve the right to offer my perspective to my clients however, even if sometimes they don't agree!
It can be hard to tell people what they need to hear, as opposed to what they want to hear. I know I let one couple down that way several weeks ago. There had been a "get rich on no money down" guru come through town and they wanted to affirm some of his teachings. Now I am one person who actually likes to hear various presenters in the hope that somewhere in their teachings there is something useful. Unfortunately, most of the time these characters just want you to buy their book and enroll in their continuing education programs. There is an old saying that those that can, do; those that can't, teach.
There are six critical success factors for successful income-producing property investments - price, location, quality, potential, financing, and tenant profile. Experienced investors are always on the lookout for properties that deliver a favourable analysis on all six characteristics. Any fool can buy a house or commercial building and rent it out; only the top 20% seem to be able to do it repeatedly and well without losing enthusiasm.
I really enjoy working with this upper segment of the investment community. They are focused and realistic. They don't cut corners on professional advice; in other words there is a high degree of mutual respect between the investor and the consultants they surround themselves with - lawyers, bankers, Realtors, tradespeople, etc. These clients know that the best money they make will be the money they don't spend, therefore are always on the lookout for the property that will deliver the best combination of the six elements described above.
Pacesetters like these also seem to have an instinct for when to sell too. Often they will purchase a fundamentally sound property, fix it up, and then rent it out until market conditions are favourable for disposing of it. Most are pragmatic, not greedy, and will price it right, both during the tenancy phase and when selling. They know that there is a competition for good tenants, so will search until they find them, then offer incentives to stay and take pride in the property
We often get asked what a reasonable return on investment is in real estate. I think this is a question only the investor can answer. From my viewpoint, the best properties should provide good cash flow that is several points over term rates plus offer a reasonable gain in capital value in the longer term. Of course, real capital gain comes from prudent re-investment and timely maintenance. You can't let a property decline and expect to come out a winner in the end. It just doesn't work that way in the real world.
Vern McClelland is associate broker with RE/MAX of Lloydminster. If you have questions or comments on this article or other real estate matters, he can be reached at 780.808.2700 or through the McClelland Group website www.mcclelland.ca
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