Real Estate Investment Made “Less Risky”
Wil Moore, the Managing Director of the Capital Markets division of Pacific Security Capital wrote "5 Ways to Reduce Commercial Real Estate Risks". It is a good guide for those who wanted to enter into real estate development in general.
Here are his recommendations:
- Buy or build from the market’s perspective, not just your own.
- Build your pro-forma from the market’s perspective, not your friend’s.
- Form your team for the value they bring, not the jokes they tell.
- Know what your financial strategy and capacity really is, not what you’d like it to be.
- Treat people with respect, they’ll take care of you.
Aside from his 5 basic recommendations, some of the notable things he mentioned in the article were:
- An increase in $6/SF in the project cost on a $22M project can reduce the gross profit by 20% to 25%. A few more dollar increases can make the project unfundable.
- A property purchased or a development started today will be subject to different market conditions than a project just completed.
- If you and your team are not experts and don’t have the latest resources in the type of project you are investing, then your trust with each other is not enough to overcome failure.
- A lender is the most objective partner you will have.
- A purchase or project that cannot be completed without a high leverage funding indicates that the transaction is beyond the capacity of the sponsor
- A successful $10M transaction will build your balance sheet much faster than a failed $50M transaction.
Overall, I would recommend that you read the whole article, specially if you are an aspiring developer. Wil Moore mentioned a lot of good points that can guide you on how to manage risk in your real estate development.
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POSTED IN: Insights and Commentaries, Road to Profits
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