Friday, November 30, 2007

Buying real estate? It's not all price and cash flow...

Jeff Brown has a first-rate post about real estate investing and the various factors he considers when doing a deal. He reminds us that you cannot just look at the price and the cash flow and say "Sold!" This story is a must-read for the neophyte and a good reminder for even the experienced investor.

I would add one other thing to Jeff's list, if I could. Are there legal obstacles that might cause problems down the road? For instance, if the building is destroyed for some reason, can the property be rebuilt in at least the same size and use as it is now? (I'm thinking zoning or other land use changes, etc.) Are are there agreements, restrictive covenants or other binding obligations that could be trouble down the road? Stated more simply, sometimes the price is attractive for a reason that you cannot ascertain without careful due diligence.

3 comments:

BawldGuy said...

David -- Thanks so much for the positive review.

And your addition -- right on point. In fact, you and I are gonna have a conversation very soon. :)

We pay far more attention to title issues than do most investment brokers. As you suggest, there are just too many potential snakes in the grass to gloss over.

Thanks again -- I look forward to talk with you.

Kenny Pratt said...

David,
I completely agree with your comment about due diligence. Especially true when purchasing commercial property.

My company is in contract to purchase a self storage in central CA. Some of the things we do to make sure we are getting what we think we are getting include:
Comparing the seller's P&L to the property's bank statements. Is all of the income on the P&L making it into the bank, if not why?
Where are the certificates of occupancy?
What does the planning and building department say about competitive projects in the development pipeline?
Taking the rent roll and physically looking at all of the storage units. Are all of the rented spaces rented and the vacant spaces vacant?

Anyway... good addition. I'll have to write a more detailed post on my blog about some due diligence lessons I've learned buying a lot of self storage properties.

David Stejkowski said...

Kenny: all excellent points. I look forward to reading your insights. And Jeff, I'm looking forward to that conversation! :)

 
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