“Buy low, sell high” is the most common technique real estate investors’ use; a technique may have worked beautifully in the past years during the boom but now is almost obsolete, and would not be a wise method to use when competing with the sprouting of short sales and bank owned properties.
Photo by: ~jjjohn~
Good deals usually mean properties that can be purchased at the lowest possible price, hold for a while or fix it up quickly to sell high. This method works well in a seller’s market because of lower inventory and absorption rates when demand is high, but what about today’s buyer’s market when you buy low, you sell lower?
One of the methods I’m experimenting in my real estate profession is the idea of buying brown and selling green. As the market shifts, our strategies and ideals must shift with the market. Corporate companies that are surviving today cut costs, reduce unnecessary spending, and create sustainable strategies to make profit. Now taking the same ideas and applying into my real estate business, personally I have been reducing my consumption of paper usage and previewing properties on Google Earth and the MLS to save mileage on my Prius. I also try applying the same formula of reducing carbon footprint to real estate investing properties. In calculating cap rate, the formula applies:
Gross Income – vacancy – expense = Net Income Net Income/Purchase Price = Cap Rate
Usually vacancy is 3-5% and operating expense can be up to 35% in most investment properties.
Income is directly correlated with the market, however vacancy rates and expense is not. Greener properties are proven to have less vacancy rates and less operational and maintenance expense in buildings. Suppose a greener building have 1% vacancy because most tenants desire to live in that apartment and expense is only 10% max because of greener landscaping and less utilities usage, what’s saved (2-4% vacancy rates and 10-20% expense) becomes savings…in essence profit that would add back into the equation. I think today’s real estate investing is about how to creatively reduce cost and increase equity. By that I mean not buying low and selling high, but buying brown and selling green.
So what do I mean by brown and green properties?
I define them as:
Brown Properties: Waste energy, eyesore for the neighbors, liability for the community, and does not cash flow.
Green Properties: Save and create energy, beautifies the neighborhood, asset to the city, and cash flows.
How to spot a Brown Property:
Properties that has not been used for its highest and best use (ex. small house on a multi- zoned lot, infill lots).
Properties that need major repairs and remodeling.
Properties that have been condemned and/or are financially distressed.
Properties that are inefficient have poor indoor air quality, toxic, and/or contaminated… like most properties.
Sounds like more than 70% of the properties on market are brown properties! To convert brown properties to green properties one can do the following:
Find ways to reduce consumption of energy and water in the property. Examples such as increase insulation, change windows, HVAC and Furnace, install energy efficient appliances, etc. Find out local and government incentives and rebates on such improvements, especially if you’re thinking about installing solar. Goal is to reduce operational and maintenance expense in the equation.
Use green remodeling techniques such as painting with no-VOC paints and using recyclable made flooring and fixtures so you can market your property as a sustainable and healthier place to live/work. Goal is decrease vacancy rates in the equation by adding benefits for tenants who lives/works there.
Oh, and don’t forget to gain benefit from Obama’s new $780 Billion Stimulus Bill. The bill provides $8,000 tax credit that would be available to first time home buyers for this year and does not require repayment. Also home buyers can claim up to 30% with purchase of new furnace, windows, and insulation. In commercial properties, the HR 1 provides significant funds for state energy programs, which could be used to support commercial property owners investment in energy efficiency upgrades while owners seeking to invest in alternative energy systems for onsite power generation would benefit from the Department of Energy Renewable Energy Loan Guarantees Program. This particular benefit to small businesses would be certain provisions of the bill that provide tax relief in the area of bonus depreciation and capital expenditures, as well as the 5-year carry-back of net operating losses for small businesses.
In calculating cap rate, or profit, I use a more simple formula:
(Brown Property) + saves energy + saves water + upgrade – incentives/rebates = Green Property = More $ GREENS $
Many investors are afraid to buy properties in the current real estate market because they use the old idea of “buy low and sell high”. However I believe with the price depreciation at all time low and everything’s on sale, it’s a great time to “buy brown and sell green”!
Be Green, Be Gorgeous!