Re: Embrace the Problem. - Posted by ray@lcorn
Posted by ray@lcorn on February 02, 2006 at 11:39:59:
I agree. Your strategy of buying an ugly house in a good market works for commercial properties too. However, “ugly” may be somewhat differently defined. In this case it means it’s empty… and carrying an empty building is no fun.
But assuming the market has the fundamental prerequisites for future growth?such as the point John made below about Austin being a state capital?then the challenge is to devise a strategy that allows you to survive the lean years and still be alive when things get better.
That may mean buying the buildings so cheap you can afford to carry them. That’s what deep-pocket investors like Sam Zell did in the early nineties. (But he went too far the other way in San Francisco, buying at the top of the market in 2001, just before the dot com crash… but that’s another story.) Zell almost single-handedly created the REIT industry by buying scores of distressed assets so cheaply that he could afford to wait for the market to come back.
But that’s not a viable strategy for me… I’ve got to get a return from every dollar I invest or I will soon be out of dollars.
So when I spot a market poised for growth (and I’m not saying west Austin is… this is just the example we’re working with) I start thinking about ways to acquire or control property in a way that doesn’t bankrupt me in the process.
Possible strategies can include straight options, pre-paid leases, master lease with an option to purchase, exchange of other assets, or perhaps a sale with an owner-financed cash flow mortgage.
The key is to control the property without having to pay for it until the property can generate its own funds.