Real Estate Investors Should Upgrade

Down Markets Provide the Perfect Opportunity to Buy Bigger or Better

Sep 28, 2009

Investors with capital to invest should look to purchase properties in more attractive neighborhoods or consider increasing their unit sizes.

The biggest advantage to an investor in a down market is the ability to acquire better properties at a discount. Investors with a fixed amount of investment capital can get much more bang for their dollar because prices have decreased, but more importantly, because sellers need them more than they need the sellers.

Bigger Investment Properties

Before considering moving up the property ladder, investors should ensure that they can handle the increased work load. If investors specialized in duplexes, the move to a four or six unit property could be significantly more management. Don’t be surprised if larger properties increase management responsibilities exponentially. If cash flow dictates, it might be worth the time to consider an asset management company. Keep track of their involvement and the number of repairs at the property. If it appears that the property can be managed fairly easily, then get rid of the management company after the first year.

Investors should also remember that larger properties have higher expenses. Even though down markets allow investors to buy bigger properties, the purchase price has no effect on the expenses. Condo buyers should be acutely aware of significantly higher association dues. All buyers should expect higher utilities and higher maintenance costs. Be sure to get the past year’s expenses and repairs. It should give some idea of the properties run rate. Also factor in much higher expenses for items like hot water heaters or boilers/furnaces.

Consider a Better Neighborhood

Bigger could also be replaced by better. Moving to a better neighborhood is also a good option in a down market. These neighborhoods tend to recover faster and possess much more upside to the investor. Again, investors should understand the different management requirements of a higher class of properties. Nicer finishes means more upkeep and more stringent management.

Additionally, nicer neighborhoods mean a different tenant base. Investors that specialize in lower income areas might find it challenging to market to higher income tenants. This would also apply to new families, empty-nesters, etc. New tenants require a complete change in marketing.

Investors should strongly consider moving to better markets or buying larger properties in a down market. Investors will benefit from a faster recovery and potentially higher investment profits in the future. Before making the move; however, investors should ensure that they understand the new challenges they will face. Not only will they possibly be managing a bigger property with higher expenses, they could also have a completely different tenant mix. Don’t sacrifice a competitive advantage to move to a better or bigger location, but look for the opportunity to better investment properties at no incremental costs.

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