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Read Our Blog

June 10, 2011

Developed Lots – Hidden Gems!!

Filed under: Real Estate — X-NINJA @ 8:54 am

What’s Hot in Real Estate?

By James M. Maloney

Genesis Real Estate and Development, Inc.

 

I have an expression I like to call “The Cocktail Party Mentality”.  I use this when referring to the average investor and how they decide what and where to invest.  Have you ever been at a cocktail party standing around and someone says, “I just bought 500 shares of a great internet start up and doubled my money in one week.” Or, “A friend of mine put gold in his portfolio and had a 200% gain in two years… more recently, I’m sure you’ve heard this one, “I know a person in Phoenix who just bought a $40,000 home in Cave Creek at auction and now rents it out for a 20% ROI.”.  Every so often, there is a new “Hot Topic” in investing either internet stocks, gold, or rental properties.  People hear their friends talking about them at baseball games, around the office, or standing around at cocktail parties, and they think, “maybe I should invest in one of these”.  Next thing you know, everyone has jumped on the latest investing trend.East Inflatable Rentals

 

Unfortunately, one of the hottest areas investors should be looking at this summer will not be the topic of conversation at this years Cocktail Party, which is buying and holding developed lots.  These often overlooked gems are not sexy but they do have the potential for some significant returns if you have the cash and more importantly, PATIENCE.

 

To explain what I mean, let me back up a little.  Back in 2005-2006, if one were to come to The White Mountains looking to buy a developed lot, meaning a vacant track of land in a subdivision or in an area that has all the utilities available, there were not many options.  Demand had skyrocketed, and people were building and buying faster than SocialTrusts.com developers could put out product.  This didn’t go unnoticed and all over the mountain, developers started buying large tracks of land for future subdivisions.  Torreon, Bison Homes, Elk Springs, Walnut Creek, Pine Vista Estates, Cedar Ridge, and the list goes on and on.  The problem is, once you purchase land to develop for a subdivision it can take 2-3 years to have a fully developed lot ready to sell.  A lot changed from 2006 to 2008/2009.  What we are left with is a landscape of partially built subdivisions with hundreds of vacant developed lots for sale. 

 

Developed lots create a great opportunity for investors.  Owners of these lots, mostly developers, are really motivated to move them.  After incurring large upfront costs to develop the land, they are being forced by investors or banks to start moving some of their inventory.  This has led to really aggressive pricing usually well below the original cost to develop them.  People have the opportunity to come in a negotiate a deal with a developer to buy several lots at a significantly reduced price.  These lots can be tucked away in a portfolio and wait for things to turn around.  Once it does, and it most definitely will, demand for lots in these desirable areas will return.

CAP Rates

Filed under: Real Estate — X-NINJA @ 8:40 am

CAP Rates

 

By James M. Maloney

Genesis Real Estate and Development, Inc.
 
Are you an investor looking to buy an income generating property? Are you a business owner looking to sell your company?  Understanding CAP Rates is a fundamental tool that you should be aware of.

 

Many real estate investors determine the value of an income property by using the Capitalization rate, other wise known as CAP Rate.  Wikipedia’s official definition is “The ratio between the net operating income produced by an asset and it’s capital cost (the original price paid to buy the asset or alternatively its current market value)”. 

 

 The rate is calculated in a simple fashions follows:
 
Cap rate = annual net operating income/cost (or value)
 
To determine net operating income, you would need to take the total gross lease income during one year and subtract all fixed and variable costs.  CAP rates are really an indirect measure of how fast an investment will pay for itself.
 
To better understand how CAP Rates have changed and why they are important, take a recent Wall Street Journal report that showed from 2001 to end of 2007, the cap rate for offices dropped from about 10% to 5.5%, and for apartments from about 8.5% to 6%. At the peak of the real estate bubble in 2006 and 2007, some deals were done at even lower rates.  We also witnessed this across the White Mountains where CAP Rates hit historic lows during these times. 

 

Since 2007, the trend of low CAP Rates has reversed as real estate prices have declined faster than rents.  This means that CAP Rates have returned to higher levels on everything from Apartments to Medical Office Space.