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Basic Real Estate Project Planning and Management
This will be elementary to seasoned investors, but I’m assuming many investors using BiggerPockets are beginning and collecting information, so I thought it might be useful to go over basic project planning and management. I have learned these things from experience, but mainly through knowing smart investors.
When considering a project, get information on the maximum income the property will bring.
Factor all the costs and time involved in getting the property to it’s max according to what you are paying for the property and the costs involved in maintaining it. Don’t give up on the property if your figures show that it seems to already be at the max and no improvements will bring significantly more income– look for ways where costs can be lowered — is it managed correctly? Is there any way to lower expenses? Can you get better financing? But know the numbers. Make sure you have projected the lowest possible operating expenses. keep cutting until you get to the bone.
Determine where your break even point is.
If it is a single occupancy investment property make sure you choose your tenants wisely because you only have one tenant and if the tenant doesn’t pay then you have zero. There’s less risk in multiple tenant properties, and you can figure what percentage of occupancy is your break even, so you know anything below that will cost money. Getting a very good history of occupancy rates is critical before buying to make sure the property has a history of at least breaking even, then there may be improvements you can make to increase the occupancy rate.
When renting to a tenant who will be running a business make sure you know as much as the tenant about the likelihood of the location being amenable to the type of business going in — don’t expect the tenant to be making a wise decision. Learn to analyze demographics so that you can make informed choices as to tenant’s prospects of being profitable and paying the rent. Sometimes you can even be helpful to a tenant by making suggestions that could help their business — be involved and proactive, because it will help you in the long run.
But the main thing is sticking to your goals and making sure the investment is what you want it to be, and also making sure the property is not at the end of its usefulness — this doesn’t mean you pass on it, but if the property has no other good use, then yes, pass on it and don’t jump because of price or some stubborn dream to own a certain type of property that’s just no longer producing and will soon be useless. Always be ready to change and never get emotionally attached to an idea.
And be careful of following the crowd when there is news of new city planning and development — sometimes it might be best to get in on the second wave after anxious investors have bought land expecting big development to take place, only to run into delays and set-backs that cause the first investors to sell at a discount to get from under it. A few years back, there was news of a Mercedes plant coming and investors scrambled to get in on the action — Mercedes backed out and never built here, but there is a lot of cleared land that can be bought reasonably where the plant would have been. Always be smart, wait and see, but don’t wait past the time to make the best deal — timing is everything and almost impossible to judge correctly all the time. But, if you use sound economic judgment and common sense you will time it close enough most of the time.
After all your analysis regarding use of property, choice of tenants, maximum income, and operating costs, everything is in line and you can get an acceptable rate of return, then run it all by someone with experience for a second look — it always pays to get advice.