How to Invest in Real Estate Property
Property Investment Strategies
How to Invest in Property ?
So you've decided to consider property investment in order to create sustainable wealth into the future.Your reasoning for property investment is not that important at the moment as most business savvy investors are aware of the benefits when considering property investment as a pillar to their investment protfolio coupled with stocks and bonds of course.
What you will read here are the basic criteria used to select the most satisfactory property investments when creating your property portfolio.We will break these criteria now into 4 groups being;
1. Shareholders Philosophy
2. Objectives and Criteria
3. Plans and Policies
4. Basic Screening Criteria
Well let's get started shall we.
The first step of the shareholders in the property investment syndication is to establish the future value of the intended property portfolio.Fro example, there may be 4 shareholders, who have decided to ensure that in 10 years tim, they each have a property investment portfolio value of $2 000 000. This means that the total property portfolio will have an intended total value of $ 8 000 000.
The shareholders may wish to also gain some capital growth over the 10 year period on an annual basis, but will not factor this into any equations due to the unknowns in the macro -economy. A decision may also be taken to provide a spread of the risk associated with the protfolio in order to ensure sustainability over the 10 year period.
This brings us to the objectives and criteria portion of this strategy.
The Objectives and Criteria of the Shareholders
Now flying blind into an investment can be a serious risk and thus it is imperative to establish some boundaries for the search criteria when identifying the properties the shareholders wish to purchase for their property investment portfolio. Some opf the following may be considered and strictness of adherence hereto decided by the shareholders;
- Maximise the Return on Investment with minimal risk.
- Eliminate Industrial,Residential or Commercial from the selection process.
- The same geographical area for managability.
- All must be within 5 miles of a Central Business District for tenant continuity.
- The sites must be within 25 miles of the shareholders residences for ease of managability.
- Future Capital Growth must be ensured for the area and property value increasing annually.
- All Leasehold properties and agricultural sites excluded.
Other factors to be considered are the skills of each shareholder as their profession or skill set may enable smoother running of the administrative and risk management of the portfolio.
Plans and Policies for the Portfolio
The Plans and Policies of a property investment portfolio are best described as the methods by which the risk involved is evenly distributed throughout the investment portfolio to maintain the desired objective of the shareholders in creating the portfolio in the first place.
This is most often accomplished by allocating the funds for acquisitions of property in the following manner according to how risky or risk averse the shareholders intend to be over the 10 year period.
- A higher value property may be selected if it is of a low risk nature. (For example, a national tenant or Stock exchange listed tenant is more likely to see out the 10 year period.)
- A medium value property with a medium risk may be defined as a supermarket with a long term history in the area is not likely to move soon, but is still possibly subject to unforseens without national backing financially.
- A low value property with a high risk assessment, could be producing excellent yields and returns, but could be tenanted by Mom and Pop operations or shorter term leases meaning more attention from the shareholders with greater rewards.
The mix of the above should be determined according to the needs and beliefs of the shareholders.
Basic Screening Criteria
The Basic screening criteria is used to scrutinise properties which have met the objectives portion of the shareholders and is a more detailed analysis of each properties' performance and history.
- Are there any incentives for Tax or City if the property is purchased saving cashflow.
- National Tenants only, unless the raturn on investment is say above 15% per annum.
- A minimum return on investment of 10% yield per property.
- The site must be on a major traffic route.
- The site must have on site parking or bulk available still to be developed.
These questions will help the shareholders in ensuring that not to much emotion is involved in the decision making process when compiling the property investment portfolio.
The Final Step
Once the shareholders have agreed in principle to investigate a specific property in finer detail, then it is believed that the financial implications can be ascertained much easier.
A feasibility analysis can now be carried out on the structural integrity of the building, leases and maintenace programs as well as historical performance of the tenants rental payments in order to create a more accurate interpretation of the property if absorbed into the property investment portfolio.
I hope you have found this helpful in posing questions for your own portfolio and the objectives for which it is created.Please feel free to read some of my other property related articles.