Are you in love?
In the many years I have been in the commercial mortgage business, I have had the distinct pleasure of meeting many commercial real estate investors. Some were very opportunistic, making bold moves and taking risks, to attain their financial goals. Others were more cautious, and almost risk averse. They hunkered down with a buy and hold strategy, and were quite prepared to play the long game. And then there were those who were just plain in love. Yes, they had fallen in love with their property!
Love-struck property owners had strategies more rooted in emotion than logic. Are you one of those investors, or do you know someone who is?
Take the self-help test
How would you know if you suffer from this affliction? Take the self-help test:
- Do you think of your property as a real beauty? A rose among thorns? Do you often drive by the property and show it off to your friends?
- Would you find it very difficult to ever sell the property? Perhaps its been in the family for years. Could you imagine being the one to list it for sale? Does that thought make you break into a cold sweat?
- Do you find yourself making improvements to the building, and spending money on it, just because you can? Didn’t you just paint that lobby wall last year? Are you doing it again?
- Are you indifferent to, or just plain ignoring the fact that your property is generating an abysmal Return on Equity? Have you ignored, or missed an opportunity to refinance your mortgage, even if its your best interest to do so?
If you answered yes to these questions, you are seriously in love! Not that there is anything wrong with that, but do not let emotion rule your property investment strategy. Pride of ownership is commendable. It is however, quite possible to go overboard! Manage your property like an investment that it is.
Real Estate Yield
In a previous post we discussed the importance of the understanding of Real Estate Yield. In particular, we discussed Cash on Cash returns (Return on Equity). If your property is generating an ROE that doesn’t meet your expectations, consider refinancing/increasing your mortgage to draw out or release equity. In so doing, even if your property is stabilized from a cash flow perspective and no further income increases are anticipated over the short term, your ROE improves as a result of reduced equity. Your decisions in this regard will dependent on a host of factors, not the least of which is your overall property investment strategy.
What is the take-away here? Falling in love is a wonderful feeling, but don’t let emotion rule your day. Perhaps its a bit cold, but love the numbers, not the real estate. If the numbers don’t support the longer term vision that you’ve set out for yourself, then perhaps it’s time to consider a different strategy?