Real estate investing can be a complicated matter. There are so many different approaches to take and it’s difficult to know which one is right for you and your goals. Luckily, Shopoff Realty Investments is here to help breakdown the most common types of land investment.
Value-Add
According to Shopoff Realty Investments, a value-add approach is when real estate investments involve an element of renovation or re-entitlement in order to drive up the property’s market value. Real estate companies who sponsor value-add projects focus on acquiring and transforming properties to achieve their highest and best use. In some cases, a value-add approach is also taken simply to bring poorly leased properties or a property with substantial near-term lease rollover to “stabilized” status.
There are risks associated with any value-add project, including the costs. Some properties may only require minor repairs like a fresh coat of paint and a new roof, while others may need more significant changes in order to create value, such as re-entitling the property for a new use (i.e. entitling a former industrial property for residential). Adding value to properties through renovations or entitlements can not only be expensive, but also time-consuming, and can end up costing more time and money than originally thought. This is why it is imperative to have the experience and expertise necessary to complete these projects, and extensive due diligence to ensure you know what you’re getting in to with each property.
Properties that make good value-add candidates include those suffering from operational or management problems, capital restrictions, those that are in physically poor shape or properties with buildings/uses that are no longer operational. When compared with other real estate investment approaches, value-add is considered medium to high risk. Conversely, value-add projects also have the potential to offer medium to high returns, which can make all the time, energy, and financial capital well worth it. However, if the operator fails to meet its investment objectives, they can fail to meet their projections which could diminish the return on the value-add property.
While Shopoff Realty Investments focuses on strictly Value-Add real estate investments, there are other strategies when it comes to real estate investing as well such as Path of Growth investing and Land Banking.
Path of Growth
Path of growth is all about investing in real estate in up and coming areas, which can allow you to see a relatively high return on your investment if that area indeed sees growth. The key to path of growth investing is timing. If your timing is right, and the community in which you invest does see a boom, your property may produce higher than average returns. Conversely if the community does not see the growth you anticipated, you could be stuck with the property for years or decades to come waiting for that growth to come to fruition.
There are many factors that an investor must consider when determining whether a certain town, neighborhood, or city is “up and coming.” First, you can look at geography. In some cases, geography will dictate the path of growth, as it is extremely challenging to build a neighborhood on a steep hill. Available land is also critical. If the town is already overdeveloped, or alternatively, if the city is surrounded by protected land, such as natural forests, then the possibility for growth is limited. Retailers and highways can often be great indicators of up and coming areas. Have major retailers recently opened locations in the area, or do they plan too? Similarly, are there mass transit projects in the works? Was a new highway or road recently built to this area? Real estate investment opportunities tend to spring up in highly accessible areas.
With a path of growth approach, the costs associated with the property can be less than value-add as you’re not making significant changes to the property or land. However, it is risky as the success of the investment depends on whether your prediction was correct.
Land Banking
Lastly, land banking is the process whereby a property developer buys land, divides it up into smaller sections, and then sells it to real estate investors. Investors can buy a plot of land, or an option to purchase a plot of land, which is known as an option agreement. The option agreement is usually dependent on the land being approved for development by the local governing body.
While land banking can be a less expensive method of getting into the real estate market when compared to buying an investment property, it does come with risks. For example, investors involved in land banking have very little protection if something were to go wrong. For one, the developer could fail to obtain the proper entitlements required for development, which is a strong possibility considering the wide variety of restrictions on land development and rezoning. Land banking also tends to be slow in nature, so investors must be aware that while the ultimate returns could be great, their money may be tied up for many years to come.
Shopoff Realty Investments concludes that the key is to do your research in advance and know exactly what you’re getting yourself into, and also to partner with experts and trusted firms who have the experience and capabilities to be successful in real estate.
An investment in a Shopoff limited partnership involves a high degree of risk, including the possible loss of your investment, and is illiquid with an uncertain liquidity date. Information in this article does not constitute an offer to sell or solicitation of an offer to buy any security. Securities offered though Shopoff Securities, Inc. Member FINRA/SIPC
