Buying Real Estate Below Replacement Cost

The real estate market is on the upswing — there is no hiding that anymore. While that is good news for existing real estate investors, finding quality acquisitions …

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The real estate market is on the upswing — there is no hiding that anymore. While that is good news for existing real estate investors, finding quality acquisitions is becoming increasingly more difficult as prices continue to rise. There are numerous real estate investment strategies out there, and I’m not about to tell you which one is best — at the end of the day most of them can be successful if executed correctly. Instead I’m going to talk about my investment philosophy for today’s real estate market.

Understanding Current Real Estate Market Dynamics

Before I get into specifics regarding my investment philosophy, I want to lay some groundwork about dynamics impacting the real estate market. These dynamics in particular are the driving force behind my strategy.

  1. The real estate market is on the upswing
  2. The rental market is strong
  3. Builders are re-entering the market
  4. Building costs will increase
  5. There is still a huge backlog of foreclosed properties being held back by banks

At this point I think we can all agree on #1 and #2, so I won’t spend much time on them. As far as #3, it is simply a natural progression point from the first and second points. Builders build when they think they can make money. With property prices and demand increasing, builders are being drawn back into the market. Apartment developers have been back for awhile now, as the rental market is as strong as it’s ever been, but now they are being joined by residential builders. This leads to my next point that building costs are going to increase. As more stuff gets built, the need for materials and labor increases, causing prices to naturally follow suit.

My last point doesn’t really have anything to do with the others, but rather is an offshoot of the great real estate collapse. It is an area I’ve found offers a huge opportunity for the right investors — investors like me. The recession, and real estate collapse, resulted in so many foreclosures that banks couldn’t release all their inventory onto the market. If they did, it would have led to even further drops in value. Okay, so now that I’ve laid the groundwork here, let’s move on to my investment strategy.

The Strategy – Acquisition

Banks aren’t in the business of property management, so all that inventory they are holding back from the market is just eating away at their bottom line, and ultimately making them uneasy. My company — Hanover Companies — has a long history of real estate development. Looking to capitalize on the opportunity present — while also utilizing my company’s strengths — we formulated an amazingly profitable strategy.

Essentially what we do is go in to markets we like and start talking to banks about their foreclosure inventory. As I mentioned before, we are developers by nature, so we are looking for properties that were foreclosed on before the developers were able to finish construction. Ideally we are looking for a block of properties that are 70%-90% finished, so we can go in, finish them off quickly and then turn them around and move on to the next project. Since we buy all the remaining inventory of each development, we get huge discounts in pricing and enjoy nice cost of scale.

Thanks to the discounts we receive on the initial purchase, we are able to acquire property well below replacement cost, which is vital in today’s market as building costs continue to increase. If we were to build the properties from scratch, the numbers just wouldn’t work the same.

The Strategy – Exit

Looking to capitalize on our strengths as real estate developers and investors, we wanted to come up with an exit strategy that fit that mold. Because we are able to acquire these properties at such a huge discount on the front end, we have the margins necessary to offer them for resale at great bargains. We don’t stop there, though.

As developers we want to sell our inventory and move on to the next project, but as real estate investors seeing the tremendous rental market demand and income on these properties, we also want to take advantage of that. So to find a happy medium, we put together a program whereby we flip a portion of our properties to our network of investors providing a quick sale for us, and also allowing us the option of retaining some units in a development — the best of both worlds.

We’ve done so many of these now that we decided to bring in some staff to take care of property management on our properties. We are even providing turn-key investments for our network of investors as well, so they can buy properties from us at bargain pricing and with a tenant in place from day one.

Conclusion

Now I understand that this strategy isn’t going to work for everyone. Hanover has a huge network, and resources that simply aren’t available to a typical real estate investor. Thanks to our investor purchase program, though, it is possible for investors are able to piggy back on our investments. At the end of the day, there are a few things I want you to walk away with.

  1. The real estate market is heading up – the longer you wait to get in the game, the harder it is going to be to make money.
  2. Building costs are increasing. Buying a property below replacement cost gives you a leg up.
  3. To be successful in real estate investing, you need to have a solid strategy — ideally one that plays on your strengths. This strategy must include acquisition and exit. If you don’t have the right strategy in place when you acquire a property, you are doomed before you ever begin. And if you don’t know how you are going to exit from the property, then chances are you are never going to see a return on your investment.
Happy investing!

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