Investment property strategy

Calculating potential future value comes down to: what is the need? What will tenants (families, businesses) require? What will be the demand for property and how might it change? Or even: who might want to put funds into a property project (instead of in an underperforming super fund, for example)?

The answers to these questions provide the answer to your key question: what is the potential rental and/or resale value of this property? The beauty of including this in your initial appraisal of a deal is that you are factoring in the need, demand and potential for added value prior to commitment. You’re working out your exit strategy before you go in.

Exit strategy

You need to see the whole picture of your project before you start. When you decide to crystallise the potential of your asset, and who might be the buyer. In the property business, it is vital to focus on the exit strategy at the start and to work towards it. For one thing, an underpinning exit strategy is important when we do our market research so that we don’t over-capitalise on a property. It’s also important in funding, as any financier (especially if you’re going for venture capital or mezzanine funding) is going to want to ensure that there’s a clearly-defined market with room for a healthy profit margin.

Even better: pre-sales. Developments, especially of residential units, can take 6–12 months to complete. A bank or other lender is going to require a percentage of guaranteed or pre-sales. Note that these are not fail-safe: the financial circumstances of the would-be buyers may change prior to settlement, or the market could fall in value. Lenders often cover themselves for these eventualities by discounting pre sales by up to 50 percent. As developers or prospective developers, it’s up to us to have a clear exit strategy, and ideally, a back-up for the worst case scenario.

Examples

Solving problems: property subject to flooding

My current four-hectare (10-acre) head office site in Nerang, Queensland was purchased in 1995 for $250,000. The land was zoned rural and under the strategic plan it had the possibility of becoming office, open space and entertainment facility (opportunity). The constraint (threat) was that the site flooded and no one was previously able to get past the flooding problems. This made the land potentially near worthless because people thought buildings couldn’t be constructed on the site.

My solution was to solve the engineering problems and liaise with the council to allow floodwaters to be diverted to an area previously not considered. As a result, the property was rezoned from rural to office and equestrian. The land purchased for $250,000 in 1995 was valued in June 1999 at $1.16 million. And the risk? A refundable deposit of $10,000 which was negotiated as part of the conditional contract of purchase.

Buying time: property without amenities

A property at Hoppers Crossing in western Melbourne is zoned rural and under the strategic plan for the area, it has the ability to be rezoned residential (opportunity). The asking price is $800,000 – and it can yield 130 subdivided lots. Other subdivisions in the area are achieving prices for the same yield of $1.3 to $1.6 million. The threat is that there is no sewerage to the site.

Solution: hold the property for two years on an extended-term contract with the vendor, where he shares in the future profit (no outlay from you). By the time the sewerage becomes available in two years’ time, the property will have increased in value to around $1.6 million.

Identifying the Need

What is the need that your property ‘products’ might fill, thus creating a market for you? In this session, we will look at some broad possibilities – but the important thing will be your awareness. You need to be constantly matching up potential needs and potential need meeting property products as you talk to people and view properties.

We have already considered some of the key needs property can fulfill:

• You may acquire and develop residential property that meets the needs of future buyers (whether residents or investors). If you are looking at developing in a particular area, why not advertise for parties interested in acquiring units or houses in that area, so that you start to build up a database of potentially interested clients?

• You may acquire and develop commercial property that meets the needs of businesses for premises suitability, access to infrastructure and exposure to potential customers.

Why not start contacting expanding businesses to identify where they may be looking for future locations to lease or purchase, so you can begin hunting down sites for them? Think of all the fast food chains, service stations, retail outlets, convenience stores and food outlets – just to mention a few categories – that have a continuing, growing appetite for property.