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Techniques for Building Value and Protecting Your Real Estate (5-12)
By arlene | December 9, 2007
1. SUBDIVIDE BEFORE PURCHASE
This technique is based on the principle that smaller portions command higher prices. If you are acquiring property that can be easily divided, consider doing it concurrently with acquisition, so that at closing you have two parcels instead of one.
This builds in future value and increases flexibility when you are ready to sell or exchange. The property must be divided by legal description, and the financing must be separated so that no overlap restricts the subsequent sale.
2. SPLITTING THE FEE INTERESTS
You can often increase the profit of a real estate investment by viewing the various fee interests as separate values. Are the water rights saleable without reducing the value of the surface rights? How about the mineral rights? Could you lease a 50% interest to an oil company that would like to protect its future exploration area? What about leasehold interests? Could you lease the land now and actually increase the value to an investor? And what about the gravel deposits? Is there a concrete company that might be interested in buying the sand and gravel and then restoring the surface? Real estate is more than land; even air rights are sold and leased in densely populated areas. When you are ready to sell or exchange, look at the entire bundle of rights that constitute “real estate.
3. DIVIDE THE DEBT AND REFINANCE
If there is a problem with the marketability of property because of the size of the debt, consider dividing it into smaller loans secured by portions of the property, or by different property. Property that is overfinanced can be made marketable by carving off a portion of the loan or removing a second mortgage, and placing it on a different property acceptable to the lender (maybe a first position on a free-and-clear house). This approach can also create equity for exchange.
4. DIVIDE THE OWNERSHIP BASED ON CONTRIBUTION
Cash is not necessarily the most crucial element in real estate acquisition; the more you know about financing, the less important it becomes. If you are putting a project together, consider apportioning the ownership based on the contribution of the partners to completion of the project, rather than on their bank accounts. Anybody can have money, but not everyone can put together a successful real estate project.
One partner may have a background in land development and cash, so he puts up cash for 25% and effort for 25%. Another partner may have cash but no experience and, therefore, puts up cash for 25%. The third partner may be putting the financing,land acquisition, and leases together, and has no cash, but earns 25% of the ownership. The cash involved meets the equity requirement, but the ownership is divided based on the skill value contributed by each partner, value that is essential for the project’s success.
5. RESORT CONDO
Motels and hotels in seasonal areas often have a difficult time making consistent profits, so they are frequently for sale. By establishing a legal description for each room and setting up the financing correctly, you can sell the motel as a condominium. Return customers are likely buyers, and the seller can retain management for a fee. Each new owner gets rental income when not using the property, and the former owner gets management income, sale proceeds, and in extreme cases, safety from foreclosure.
6. MEDICAL CENTER OFFICE-CONDO
Older medical centers can present a problem when they are out of vogue and the doctors move to newer space. The problem exists because the property does not offer sufficient benefits to draw tenants. By dividing the complex into individual office units and leasing them with an option to buy, or by selling them outright, you can solve the problem.
Also, changing the image of the complex from a medical to general professional office can increase the size of the market for tenants. Consequently, by selling offices to the user, you can often turn a complex around and increase its market value by increasing its value to the market.
This approach can be used with certain apartments as well. In fact, converting apartments to condominiums has become so widespread that the procedure is simple routine and is readily accepted by many financing sources.
7. MOVE THE HOUSE AND DOUBLE THE BENEFITS
Older houses located on land needed by expanding companies can be the start of a money-making opportunity. Buy the property along with a vacant lot that is appropriate for older residential housing. Move the house from the more valuable land to the other lot, fit it up, and rent it. Then lease the newly cleared lot to the institution.
This will create greater equity in two properties because you’ve put each to more appropriate use. Negotiation during acquisition must be done with the plan in mind so that the financing accommodates the ultimate objective. Value is increased when property is put to its most productive use.
8. USING PAPER PARTNERSHIPS
Investment clubs among business friends are quite common, but they usually apply their collective efforts toward fighting the stock market. The argument against group investment real estate centers around the demands of management, but qualified real estate management companies are readily available.
Even so, if real estate is too much for your club and you’re tired of the stock market, consider acquiring discounted paper secured by real estate. Essentially, this is the same investment medium of our most conservative institutions: savings and loan associations. With the right discount, you can often borrow all the money necessary to acquire the paper. Borrowing to buy at a discount and using the income from the paper to repay the loan can form a powerful method of pyramiding without cash. When you undertake the project as a group, you can greatly strengthen your borrowing power and accelerate your investment success.
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Topics: Company, Development, Form, Investment, Land, Market, Property, Rental, Residential, Sale |
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