REFM is re-introducing its Seven Elements of Successful Real Estate Investing framework. The Seven Elements discussed below are intended as a framework from which you can work to give structure to and increase the potential for success of your investment pursuits.
Element 1. Define your investment goal and strategy in detail and put it down on paper
If you don’t know what your goal is, you don’t know if you are moving towards it or away from it. Defining and describing your goal in writing assists you in refining and crystallizing the thoughts that lie behind the goal setting process. You may find during the course of writing and re-writing that the goal is actually something slightly different than what you originally thought it was when it was just an idea floating around in your head.
Writing your goal down also enables you to create a list of relevant investment criteria that are necessary for you to achieve your goal (maximum investment amount, time to return of capital, etc.), as well as requires you to identify your intended strategy for value creation.
Element 2. Identify your individual strengths and weaknesses, and that of your team as a whole, and address them
Performing a candid inventory of your and your team’s core competencies with respect to knowledge and analytical and technical skills is critical to setting yourself up for success.
You can never be too strong in any area, and it will benefit you to improve on your weak areas. Educate and train yourself and your team members to be equipped and ready for top performance, even in times of high pressure and chaos.
Element 3. Gather your opportunity set
What deals are out there that meet your investment criteria? Find them through all of the channels available to you: brokerages, public records, driving and walking submarkets, online listing services, and your personal and professional networks.
Element 4. Determine which deals are promising
Ask yourself the following: which transactions of those gathered are likely achievable at my desired target profit margin, and why? Under what assumptions are you drawing this conclusion? Is capital readily available for this type of deal?
After you are satisfied that the investment is realistic, run quantitative analyses to better understand its potential. First, run a quick 60-second back of the envelope analysis, with sensitivities on the key variables (price, income, expenses). If the deal looks good there and you want to get more serious about it, proceed to a monthly pro-forma analysis. We tend to pay for our liabilities monthly rather than annually, and you thus want and need to see this level of granularity in your investment analysis.
Element 5. Control the opportunity and secure capital commitments
If you are going forward with pursuing the deal, you want to have the exclusive right (option) to the property purchase opportunity for a finite period of time. This is known as “controlling” the property. Control does not mean that you are the owner of the property (and at this point, you don’t yet want to be the owner). You can achieve this exclusive right through signing an Option Agreement with the seller. This right will ideally costing you nothing more than the lawyer’s fees required to draw up the document (but will likely require some consideration to the seller).
Simultaneously with pursuing control of the property, and once you have been granted control, you will need to secure capital commitments for consummating the purchase of the property and any planned development or redevelopment costs. Naturally this capital will typically come in the form of both equity and debt.
Element 6. Execute on your value creation strategy
Take title to the property and implement your strategy, whether it is a repositioning and re-tenanting of an existing retail strip center, the ground-up development of a housing subdivision, or the renovation of an existing apartment building.
Element 7. Track project variances, perform critique, adopt best practices
While carrying out your strategy, compare your projections from your pro-forma as committed to by your capital providers. Track variances closely and critique yourself as needed. Also compare your actual strategy execution practices and techniques to those originally envisioned. Learn from your mistakes and adopt best practices for the next investment.