Everyone who has a sense of history can understand the long term view of real estate value. My personal strategy of investment and development is shaped by a vision of how any project will look in thirty years. My children say that I am a charter member of Old School and in regards to real estate, I agree. I offer a few of my paraphrased definitions and thoughts on investment and development.
Land – In economics, land comprises all naturally occurring resources, such as geographical locations and mineral deposits. In classical economics it is considered one of three factors of production, the other two being capital and labor.In other words, land is; always has been, and always will be worth only what it will produce. Wheat is worth more than corn; houses more than farm land; offices more than houses and retail more than offices.
Real – being or occurring in fact; having verified existence; also having substance or capable of being treated as fact; not imaginary – That is you can touch it, see it and use it as a real asset on a financial statement. But because it is real it must be maintained, repaired, and managed. The purchase of investment real estate, either individually or as a partner, is not a one time event. Each purchase will require a future commitment of time, energy, and, most probably, more money.
Estate – An Estate comprises the houses and outbuildings and supporting farmland and woods that surround the gardens and grounds of a very large property, such as a country house or mansion. It is an “estate” because the profits from its produce and rents are sufficient to support the household in the house at its center. True investment property is a long term, self supporting asset that is able to be maintained from its own profits. If the primary reason for any purchase is the belief it can be sold at a higher price in the future, then it is speculation.
Price – “The price of anything is the amount of life you exchange for it” Thoreau. Don’t be a completely passive investor. You gave up something to earn the money. Therefore, regardless of your income or career, invest enough money that you will pay attention to the asset purchase but not so much that if you lose the investment the loss will affect your family’s quality of life.
Partners – A partner is a member of a business entity in which the partners share with each other the profits or losses of the business undertaking in which they have all invested. – I personally like partnerships and have partners in most of my transactions. However never forget that most partners are not equal and many partnerships turn out badly. My guide to having a partner:
- You can only make money with your friends – because your enemies will not let you.
- You can make more money when you do business with people who have money rather than those who don’t.
- Therefore, in every transaction, do business with your friends and help them make as much money as possible.
Profits – To investors, revenue is less important than profit, or income , which is the amount of money the business has earned after deducting all the business’s expenses. To determine an acceptable monetary return, each investor must recognize the cyclical nature of real estate value as well as both the direct and intangible effects the investment will cause to a neighborhood’s quality of life. Change is the catalyst to profits. The individuals who invest at the first opportunity of change assume the most risk which is almost always linked to the greatest opportunity for profits or losses.
“The genius of investing is recognizing the direction of a trend – not catching highs and lows” Anonymous
Knox County and the surrounding areas are still growing. The construction of new Interstate Highways, local roads and expansion of sewer systems are only part of the elements that establish the basis for expansion. New schools at all grade levels, new hospitals, a competitive banking environment, and a growing airport are tangible examples of the results of growth. This continual growth creates the need for changes in both rural areas and urban redevelopment.
The first change is usually more housing. This invariably leads to more roads which in turn lead to retail and office construction. The families that are impacted by these changes, and almost always oppose them, have forgotten that they live in an area that was changed by the construction of their homes.
All of these developments do create genuine issues of concern. These include traffic, site access, lighting, noise, water runoff and impact on property values. Working with the immediate neighbors and neighborhood groups to recognize these problems and other concerns is critical to improving the initial design and eventually a successful project. Too often developers are cast as rich, heartless and uncaring about what they build. Land owners who are selling their land are commonly considered greedy by their neighbors, while the long time residents that oppose the developer are considered unrealistic and living in the past. To again quote Thoreau“Could a greater miracle take place than for us to look through each other’s eyes for an instant?”
From my personal experience, I know that density, the number of homes per acre, is the enemy of sprawl. Housing that is grouped closely together creates more open space not less, it is more affordable to build, and to own. Density can give more and better housing at a lower price for the homeowner with less impact to the environment. However, in an area developed before there were sewers available, most of the homes are on one to three acre lots. The concept of housing built at four, five or six homes per acres is both foreign and abhorrent to these people. They do not understand why anyone would want to live like that and certainly do not want them for neighbors.
It is impossible to satisfy the concerns or fears of every person involved in a transaction. The fact is that no development can be as beautiful as an open field or a wooded hillside, but people need a place to live; work, and raise their children. The best that any developer can do is to balance the financial cost of providing housing, office and retail services, with the neighborhood’s concern for no change of any kind.
Because I understand that a goal, no matter how noble, which is poorly planned and badly executed is still a failure, I start the design process for any development by remembering a quote by James Felt: “The smallest patch of green to arrest the monotony of asphalt and concrete is as important to the value of real estate as streets, sewers and convenient shopping.” My goal is to have the architects, engineers and home builders on my team to use as many ideas as possible from our “future neighbors” to create a unique neighborhood. From a marketing position, the final design must be different than my competitors’ subdivisions but still provide a realistic chance of financial success. From a personal position, thirty years from now, I want my grandchildren to be proud that I helped create a great place for other families to live and work.
Finally, these issues about development are not new, as evidenced in the 1922 novel Babbitt by Sinclair Lewis:“Babbitt spoke well–and often- … about the ‘realtor’s function as a seer of the future development of the community, and as a prophetic engineer clearing the pathway for inevitable changes’–which meant that a real-estate broker could make money by guessing which way the town would grow. This guessing he called Vision.”