Real Estate Investing: The Path of Progress
By Eric Beise, Realtor
Location, location, location.
It’s an age-old mantra of the wise real estate investor and no one will dispute that location is key for any long-term real estate investing strategy. The differing of opinions start flying when we talk about what goal the location is going to accomplish. As I mentioned in a previous article, there are 4 foundational ways to make money in real estate (not an exhaustive list, just the most common): leverage, cash flow, appreciation, and forced equity. Location plays a part in each of these strategies, but to different degrees. The most impactful way is through appreciation.
While no one can predict the degree a property will appreciate, there are some very helpful indicators that allow the savvy investor to make an educated guess, and thus, continuously beat the average appreciation for the local area. This is the “unfair advantage” an investor (or their team) with micro-neighborhood knowledge can use to increase the return on investment of a property. This thought process means following the path of progress.
Large corporations spend to improve infrastructure to drive traffic to the location and to attract other complementary businesses to the area, improving and enhancing the aesthetic through art and historical landmarks all because their big data driven supercomputers say it is good for their bottom line. The best part of all of this is that you, the savvy real estate investor, can ride the coattails of these entities. That’s what the path of progress is all about. You don’t have to spend any money, and when you know what you are looking for, you get a portion of the rewards! That is one amazing R.O.I.! No money spent and better than average appreciation gained.
This is all because there is a lag between the infrastructure, new businesses and the recognized value of the surrounding property. It doesn’t last forever and the indicators aren’t a crystal ball, but when applied correctly with the proper fail-safes in place, it can make a massive impact to the net worth of the investor.
So now that we can recognize the opportunity presented, we need to address the main risks:
1. What happens if “the path” changes direction and my property is no longer in it?
This is the most common question and rightly so. We need an answer to this question or we are not investing, we’re just gambling. The answer, simply put, is cash flow. We NEED a property to cash flow or it is not an investment and it becomes a liability. Cash flow provides any investor with the foundation of which they can build off of. If “the path” moves and your left out in the cold, don’t worry, you still have a solid foundation to pivot strategies from. You might not make quite as much money, but when one strategy doesn’t work we innovate and switch to the best option the market is giving.
2. How do I know what to look for? Who are these entities?
Ahh so glad you asked! There are all sorts of options here. It greatly depends on knowing who your client is. Minneapolis has a thriving art, coffee, and craft beer scene, so when I am looking at properties, I want to know how close to one of these entities we are. All the better if we can hit the trifecta within walking distance. These are particularly good options because they aren’t competing, but rather complementary industries. They also tend to be trailblazers when it comes to influencing neighborhoods. As an example, people love breweries and don’t care if they are in industrial areas or places that have nothing around them. When there are several breweries in a tight radius, we have found an opportunity! The first brewery blazed the trail, the second one solidifies the market, and any additional breweries just further intensify people’s interest in the location, and thus, the path of progress has been set!
In summary, basement finishing can be anywhere from exceedingly foolish to extraordinarily prudent. Having a firm grip on everything from the vision to the costs will save you from many headaches. Few can enter this journey alone, so if you lack confidence in evaluating a prospective basement project, talk to an expert who can help guide you through the winding road. If you have confidence, still talk to the experts; there is often victory in an abundance of counsel.
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