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    You are here: Investing : Articles : Real Estate : Markets

    Maximizing a Property's Potential Means Profits
    By Ken McElroy
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    In every city I visit (even across Asia), I hear the same comments from the locals: 'You just can't do that here' and 'The real estate is just too expensive.' Always: 'There are no deals.'

    I love that kind of thinking and I am not about to get into a battle with someone that is convinced that they will not succeed. If everyone looked at real estate like I do, then I would have significantly more competition and I would end up paying more for my properties.

    What is true is that cities are cyclical in nature, usually based on the population and employment trends in that area. Your job is to determine where your town is in the economic cycle.

    Yet, in these same cities, investors are making millions right under everyone's nose. One way to view the progress in cities is to just count the number of cranes constructing the tall buildings. Tall, new buildings equal jobs. In Las Vegas, these tall buildings are casinos. In New York, these buildings are office, multifamily and retail. The point is the same: a real estate investor decided to get a loan and build a building. I am certain the bank and the developer would not have constructed the building or secured the loan without first making sure that it was a sound real estate investment.

    I am not suggesting that you go out and develop a large property. I am simply telling you to look at the signs around you. If you pay attention to them your investment will become much more profitable. In my book, The ABC's of Real Estate Investing, I go into much more detail about my view on how to identify a market.

    The market is more important than the property.

    Let's face it, what good is an investment property if you cannot find someone to occupy it? This is pretty simple, but I find investors everywhere that gravitate to a "great deal" only to find that the reason it was so cheap is that the previous owners could not fill the vacancy. Lack of income is the number one reason real estate investments fail.

    I would rather have a terrible property in a great location in a market that is improving than a beautiful new property in an economically depressed area. I am less concerned about how my property looks than in how much it cash flows.

    Once we identify a market, we immediately set up our network in the area to start generating information and deals. We are very specific on our needs. You will almost never find great real estate deals as they are presented to you. The secret to a good deal is in what you plan to do with the deal. What can you do differently to create more cash flow and increase the value?

    We look for poorly managed properties that are creating a cash flow drain for the current owners and we improve the operations once we buy them. This is a very simple concept. In other words, we look for properties that have the potential to perform much better under new ownership. I have a team set up to do this and you can, too.

    We recently found a property located in Phoenix that was seriously underperforming. The property was self-managed by an individual that lived in Mexico. He is a very wealthy man and clearly did not have time to dedicate to the management. The property had been operating at 68% occupancy for two years and he was writing checks to cover the losses. The expenses were high and the revenue was low - a lethal combination for this owner.

    In less than one day (simply by just driving around and calling the competition in the area), I knew that the rents were low compared to the market and the vacancy in the area was about 7%. This property's vacancy rate was over 30%.

    We bought the property and quickly filled the vacant units and reduced the operating expenses through good sound management. In less than six months, we have increased the value of the property an additional million dollars. Everyone is happy with the results: our investors because the cash flow has increased and the residents who live at the property because it has become a much better place to live.

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