When is the Right Time to Buy an Investment Property if You're A Commercial Real Estate Investor?
by George Pino
Timing the real estate market for an investment property is one of the hardest things to do and one of the most asked questions, and I do have an answer to that question at the bottom of this article.
The Hearst family was once asked how they do so well with their real estate investments and how they time the market. Their reply was if you never sell, you don’t have to worry about timing the market. There is of course some truth to that, and really it goes down to one simple strategy, buy for cash flow, hope for but don’t expect appreciation.
Investors looking to quickly turn a property with minimal improvements or repositioning really aren’t investing in real estate, they are speculating the market will continue to rise. After all, a rising tide raises all ships. As an investment broker I would never recommend any of my clients make a purchase with the “hope” of anything. Instead, investors will have a plan of action as to how they will increase the value of an investment. Either through repositioning/retenanting the asset or by making improvements to the building (adding square footage, changing frontage, etc.) that will improve the desirability and increase revenue or by upgrading systems to lower expenses.
This strategy for improving value is a good one. Most real estate investments are traded on their capitalization rates (“CAP Rate”). By improving the Net Operating Income and investor can increase the value of a property dramatically. For instance, if a property trades at a 5.0% CAP Rate every dollar of increased net operating income (either done by increasing rents, or decreasing expenses) will equate to a twenty dollar increase in value. So if you as the investor put in $100,000 in upgrades but increase the Net Operating Income by $20,000 for the year, this would equate to a $400,000 increase in value, a great return by any measure.
Investors should not worry about minor market fluctuations in pricing one sees over the normal life cycle of an investment, or about the fluctuations outside their control such as interest rates. Instead, by focusing on properties with positive stabilized cash flow an investor mitigates these risks and can hold the property until the time is right to sell. Focusing on the cash flow, their holding timeline, and how to increase the net operating income lets an investor create a plan of action for their investment that is almost fool proof. An investor must still take into consideration the fundamentals of investing in real estate; location, demographics; area growth; competition and demand. By doing so it is easy to see the time to buy an investment property. It is any time after you’ve done your homework for the asset class and have a plan of action items in your control for your investment.