February 10, 2015
Real Estate Investing, What You Should Know.
This past week, I had the opportunity to meet economist, Brian Beaulieu. Brian is the CEO of ITR Economics, and also the Chief Economist for Vistage International and The Executive Committee (TEC). ITR follows long-term economic trends to assist business owners in making better decisions to help them grow their business and improve their bottom line. Brian spent an hour sharing his insights for financial portfolio growth with the members of Faith Technologies’ strategic planning leadership group. During the very informative and entertaining presentation – yes, I did mean to use the word, entertaining – Brian led with the disclaimer that he does not provide stock tips or trading advice, but does believe that stock markets and real estate are – and will continue to be for the next 10 years – smart areas to invest your money.
Choosing the stocks that will turn into the next Apple, Google or Microsoft can be very challenging, if not downright impossible. To be really successful at picking stocks, you need to have a keen sense of industry economics, politics, and enough trend data to make your head spin.
Real estate investing can have its fair share of complexities as well, but as long as you know what questions to ask, or information to look at, you will have the information necessary to make a wise investment decision. A few of the basic forms of information I always want to see before we invest in a deal is a market feasibility study, a pro forma, and the type of debt we are signing on for.
- The Market Feasibility Study is a third-party analysis, which outlines the needs for the type of product being built. For example, a market study for a hotel development will analyze the need for hotels in that market – looking at seasonal trends, activities that draw people to the area, the need for accommodations during those various timeframes, and the current number of rooms already in the marketplace. The study will also look at amenities provided at the new development in comparison to the competition. All of this information will help determine how big the new development should be to support the need in the marketplace.
- The Pro Forma uses information provided in the market feasibility study. It breaks down the construction costs and ongoing operational costs, and measures against the rates that can be charged to the guest, renters or lessee. This calculation will determine if the project will have the ability to cash flow and stand on its own once the development is in full operation.
- Recourse vs. Nonrecourse debt will have a big impact on your commitment to the project. Nonrecourse debt means that if the project fails you are not responsible for the debt on the project beyond your investment amount. Recourse debt means that you are responsible for the debt based on your percentage of ownership. Each one has different levels of risk reward; you need to determine which one you are willing to accept.
In the long run, real estate investing can be a great way to grow wealth. Real estate is a tangible asset, and as long as it is in a good market (location, location, location) and is well managed, it will continue to appreciate while providing operational returns to the investors. Don’t fall in love with a project – anyone can make numbers look good. Make sure you do your due diligence and you understand all the aspects of the deal before you cut the check.