|
Downtown San Diego
California Condos |
|
|
|
|||
|
|
|
Pre-Construction
Investing Profits: Scarcity Is The Key |
||||
|
|
||||
|
“How can I make a lot of money from a pre-construction project”? This is the question that is at the forefront of most pre-construction investors minds. “What about the risk…. I can’t afford to lose much money” is the second most important question on their mind. But for pre-construction investors, it seems that finding something that might produce great gains, while having minimum risk, can be difficult. In reality, the concept is quite simple. There is really two types of pre-construction investments that you can make. The first is where you purchase a pre-construction project for considerably less than the actual market value. In this case, you should know approximately what your profit is going into the pre-construction project even if the market stays flat. While this is a great way to invest when you can find the right opportunities, it can be difficult to consistently find these needle in a haystack, pre-construction properties. The second type of investment is more speculative in nature. In this case, you are buying at today’s prices and hoping for appreciation during the pre-construction phase. This is a dual edged sword: frequently you can make 100%’s per year if you are right but it can also be dangerous because what if you are wrong and lose money. Being somewhat analytical in nature, I like to think in terms of how to make a pre-construction investment that has a HIGH probability of making a large gain, if I’m right, and a low probability of making a SMALL loss if I’m wrong. Sounds great in theory but how do you do that in real estate? In concept, it is extremely simple supply and demand theory. You have to invest in a pre-construction projects where a lot of people want what you own but there is a very limited supply. When supply and demand is out of balance and is likely to stay that way, then you have a great opportunity sitting in front of you. Let me give you some examples from my trip this last week to an area in North Carolina that I really like for pre-construction and that we invest in with our Mastermind Group. As part of this Group, our job is to find those potential pre-construction purchases where we believe supply and demand are seriously out of whack thus yielding great reward-to-risk ratios. We already know that tons of people are migrating to this area for second homes and to retire. Furthermore, we know looking into the future, the huge baby boomer migration will send many more people to the area over the next 5-15 years. This appears to be a great start to put supply and demand on our side for a pre-construction project.
With that knowledge, you might just buy anything that became available in the area: wrong move in my opinion. Just because people are coming into the area does not mean they will want what you have bought in the pre-construction phase. Here is three examples, pro and con, to illustrate the point. Example 1: Condo pre-construction. We know that many retirees and couples without children at home want to move to condos. We are looking at a brand new condo project for our group that is priced good, nice features, etc. Does that make me want to buy it? No! What if I tell you there is almost no additional land in the area zoned for multi-family and this is likely to be one of the last major condo projects in the area. In addition, no similar condos are available to buy right now. OH YEAH!! Now that is a supply and demand mismatch. Example 2: Land Project. I looked at many individual parcels of land. In this case, someone could move into the area, purchase the land, build a house and go. Sounds good right? No! If you look around, there is tons of available land and private, small parcels available in the middle of the sticks. What is unique about that? Tons of private land owners could sell their parcels. Example 3: Pre-construction Land Project. I also looked at multiple communities where a large of amount of land has been recently sold. Several were not attractive to me but a couple really stood out. Why? One of the major attractions of the area is water and these pre-construction lots had unique access to bodies of water that would allow boating families to easily access the water from their neighborhood. Ok, not bad so far….. The clincher for me however was then seeing that there was basically very little developable land that could ever provide similar access to the water; i.e., once this property is sold out and developed, there is little more developable land that provides equivalent water access. Even though prices have already gone up a good bit on these properties, I would find them to be excellent pre-construction investment possibilities with high gain and low risk potential. To conclude, if you’re serious about growing the future value of your pre-construction investments, always make sure you look out for opportunities where the future demand is likely to far outstrip the supply.
|
||||
|
|
Gar C. May |
