Investing in Real Estate: Key Considerations for Maximum ROI - Essay Sample

Introduction

Majority of investors buy real estate as an investment whenever they require diversifying their possessions outside of accustomed shares and connections. The primary purpose of these investors is to get the most out of their return on interest (ROI). Unsurprisingly, there are numerous elements to consider while buying real estate as a venture. However, it is still reflected as one of the safest and best methods of investment. To begin with, the investor gains full control over the venture. They have the freedom to decide on what to buy and the type of funding they should use. Additional advantages include lower risk, hedge against price increases, cash flow, and tax benefits. The paper shall locate a commercial property and examine the attributes that make it a profitable investment.

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Specifications of the Property

While searching for a possible investment property, I carefully analyzed the advantages and took into consideration the potential dangers that may arise when purchasing a real estate and how to avoid them. I majored my search within Long Beach city which was ranked among the 25 cities with the rapid growth of household revenues in 2015 and 2016 (LoopNet, 2019). The city also has a plan for more than thirty projects in progress. This is a sign that the economy of the town is thriving rapidly, which is beneficial to business holders all over (Morris, 2017). I chose a property that is located in the nearness and access to the 405 freeway; 801 East Spring Street, Long Beach, CA90755. The property is a retail fee interest land with a self-supporting, business assured, complete triple net ground leased to an occupier who is entitled Jack-In-The-Box and has an outstanding lease of 11years. This property is also positioned within the main "Home Depot-anchored community center (LoopNet, 2019." The available highpoints for the property include single occupancy, triple net lease, signalized connection, has a drive-thru, unique Southern California Urban Infill site with stout demographics, and a controlled rate of 3.75 %, as well as a stable leasing escalation (LoopNet, 2019). The individual house was constructed in 2008, which means that it is still new and adequately preserved and positioned for commercial overall. The price of the building is $3.872 million, which is the reasonable market worth due to its type, and it's standing (LoopNet, 2019).

Evaluation of the Property From an Investment Perspective and Pros and Cons and Comparison

One of the primary reasons why I was interested in this property is the fact that it is a single tenancy, triple net ground lease. In most cases, single occupancy/tenancy assets have a more reasonable price than the other forms of commercial possessions. Ground lease properties enable the owner of the land to lease it to a tenant for a given duration. The tenant may develop the land during the lease period. After the expiration of the lease, the land and all the developments are given back to the owner of the land, which could appreciate the price during sale. Ground leases can have lease terms that are as long as 99years or range between 5-12years (Investment Value, 2019). The advantage of ground lease to the landowner is that there is a continuous flow of income from the lessee, who are mostly huge establishments or companies. The clauses pertaining increases, which permits the rise of rent, and expulsion rights in case the tenant fails to pay the rent, are kept in check in a ground lease general.

Additionally, I chose to purchase this house because the present leaseholder is a local fast-food corporation, that has openly traded with a reported net income of $135.33 million, $388.3 Equity, and more than 2,245 positions all over the 21 countries and Guam as per fiscal 2017 (LoopNet, 2019). Having a nationally known tenant ensures a positive continuous flow of income. Another major factor of the property is that it had a triple net lease in place. A triple net lease also called the NNN lease, ensures that the lessee is accountable for paying taxes, maintaining the building, and insuring the property, which relieves the landlords of their duties (LoopNet, 2019). This method is also the most significant disadvantage for the landlord as the price of the property is negotiated to a lower-than-market rent due to the additional expenses obligated to the tenant.

The building's cap rate was revealed to be 3.75%. Even though the cap rate is essential for such types of possessions as it informs the cash on returns to the possible buyer, or the overall money earned on the total capital invested, the cap rate is only a single piece of information (Cash on Cash Returns, 2019). Cash on returns is described as the modest commercial metric that permits the evaluation of cash flow from the company's income-earning possessions (Cash on Cash Returns, 2019). Cape rate is met by dividing the building's annual net operating income by the buying price, which shows that the building earns a net operating income of $145.2. Cap rates are also helpful in formulating the trend predictions to make future rent changes.

Advantages and Disadvantages of the Parcel & the Community

Since Long Beach is one of the fastest developing cities, the property is located in an acute setting. In September last year, the mayor pronounced that the cities plan for its highly profiled and most significant projects underway, which starts from the beach to 405 freeway. Among the projects mentioned are a 17-story leasing multipart, a considerable renovation of the town's political center, and a combined-use building in the inner city areas (Barragan, 2018). These developments are anticipated to attract a lot of people to the city, meaning that the city will require additional options for entertainment, food-chains, restaurants, among other necessities that may be needed for the people moving to this area (Barragan, 2018). This improves the worth of the property as the demand of properties for lease will be high due to the heightened business opportunities as a result of population increase. Thus, the investment proves profitable since, there is the opportunity for the appreciation of the property, due to development of the area (Investment Value, 2019).

Conclusion

Being a first-time investor, buying 801 E Spring Street is an overall secure venture, allowing a continuous flow of income from the tenant with little or no management, maintenance, or even controlling the property, with additional financial options present. The current world economy is very tight, and every individual is striving to improve their economic status by all possible means. Therefore, the opportunity to own a property with a secure and steady flow of income and little or no cost is a perfect venture in the contemporary for me in the current world. However, location is one of the essential elements to consider when purchasing a real estate, thus, the strategic positioning of the building in a city that is rapidly growing means that the price of the property is high, and there is a high-income rate. Therefore, this building possesses all the possibilities available qualities that show an excellent investment.

References

Barragan, E. C. (2018, September 4). Mapping Long Beach's Sudden Development Boom. Curbed Los Angeles. Retrieved from: https://la.curbed.com/maps/long-beach-development-downtown-project-map

Cash on Cash Return. (2019, 19 March). Retrieved from CFI Education, Inc.: https://corporatefinanceinstitute.com/resource/knowledge/finance/cash-on-cash-return/investment-value

Investment Value. (2019, January). Retrieved from Corporate Finance Institute: https://corporatefinanceinstitute.com/resources/knowledge/valuation/investment-value/

LoopNet. (2019, March 18). Retrieved from https://www.loopnet.com/Listing/801-E-Spring-St-Long-Beach-CA/14248131/

Morris, A. (2017, December 7). Long Beach Named Among Top 25 Cities with Fastest-Growing Household Incomes. Retrieved from Long Beach Post: https://lbpost.com/news/city/long-beach-named-among-top-25-cities-with-fastest-growing-household-incomes/