Rule Two Of Six: Bring Realism And Skepticism, NOT Blind Enthusiasm — Just The Facts Please – Not The Emotions!

Posted on 28. Jul, 2010 by in General

By Don R. Campbell
Cutting Edge Research Inc.

“Make sure you’re buying not because it is cheap, but because it has potential.”  Part of any due diligence is investigating what else is out there.  Discover what your competition may be and what other opportunities you can uncover that may be cheaper or provide better return. Speak to the local experts (economic development offices, city hall, etc.)

There are two types of competition you will want to check out. 

Competition #1

Other projects or properties in the region… or even in other better countries or regions

Before a sophisticated investor buys any piece of property they check out what else is for sale in the area.  The question I ask is: why do so many people NOT do this when looking at real estate outside of Canada, yet obsess on MLS for months if buying in Canada?  The answer is quite clear: it is because of laziness or blind excitement, neither of which leads to good investment decisions.

In order to ensure you don’t get caught in this trap or get seduced by an apparent bargain, you should always check out other available properties.  If it is for investment, check out other geographic regions as well.  Look for the best potential combination of year round cash flow (rental income) and capital appreciation.

 Sophisticated Investor Insight 

When looking at the proformas for comparable properties, take a look for ‘Resort Fees’ that are often charged over and above other operating expenses.  Watch for this as a hidden profit centre for promoters or developers not discussed in presentations.  How will this affect your bottom line?

Again, once you have finished your investigations on the internet (Google will become your friend), then get on a plane and visit, find out what is real (see Rule #1 above), have fun with it, make it an adventure, a holiday (with a note pad) as well as a due diligence trip.  Make sure that the area is appealing to you so that it is appealing to your potential visitors/renters/vacationers.

Competition #2 

Other projects vying for your potential renters or vacationers

If you are expecting your property to eventually produce revenue, you MUST know what else is out there competing for the limited number of renters/vacationers.  Dig deep: find out what they are charging, what they are providing for that money and find a way to ensure you will have a competitive advantage.  If you can’t find an advantage, go buy somewhere that you will.   It is easy to get lost in the thousands of properties for rent/sale in some of these hotter areas; however, any good business needs a ‘hungry crowd,’ meaning a limited supply for a growing demand.  Sadly, many first timers buy in areas of the exact opposite (big supply for shrinking demand).

In order to do this investigation properly, you must put yourself in the role of the potential tourist. Your prospects are using internet searches, more often than not, to start their vacation planning, so that’s exactly where you must start.  Start by searching for properties for rent in your target area.  Find out what the prices are, what the availability is, what amenities they’re providing. Contact them. See how good they are at handling enquiries, then compare it to yours.

Often times you’ll see when an out-of-country property is being sold to Canadian investors, a projected rental rate is quoted which turns out to be a ‘rack rate’ (or ‘dream rate’ as it is called in the industry). These numbers are unrealistic once you start checking market comparables. Often times you will also discover that the proforma sales brochure / presentation will not account for any high and low season variations.  Only by playing the role of on-line tourist would you know what’s real in the market.    

Can’t Get There From Here…

Play the role of potential tourist. Make sure your potential property would look appealing (visually, financially, accessibility and surrounding amenities) if you were a tourist planning a trip to the area.  Remember: generally vacationers often only have a week or two, so they want amenities, don’t want to spend hours getting there from the airport, and they demand good pricing.

If the only flights are long with lots of connections or the trip from the airport is brutal, what are the chances of getting a returning visitor?  Not very good.  Only invest if you can start creating return visitors including yourself, even if you are not renting it out for income.  If the property doesn’t provide easy access, after the initial excitement of owning the property wears off  (and it will end), you too may be put off by the difficulty of getting there.  Yes, it is hard to believe in the beginning, but it will eventually happen. Make sure you investigate access options in high and low season.  Does flight frequency change? Is road access as good all year?  If not, how will that affect your property and the excitement level of you or a vacationer going there?

Please look at the reality to cut through any ‘dream assumptions’ you may have.

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