Virtual Entrepreneur

Be Creative To Still Profit From Real Estate

August 23rd, 2006 | Author: MrsMoney

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Fortune:
Smart investors can still find regions and niches where prices are likely to hold up – especially entrepreneurs who know a downtown district well and can find buildings where a few improvements will increase the rent. Generally that requires imagination, effort, and money.

Investors value commercial property by the profit it generates in rent each year, using a figure known as the capitalization rate. A million-dollar property netting $100,000 a year after expenses is said to have a cap rate of 10%. Big real-estate investment funds earned about 9% during much of the 1990s, but since 2000, the prices of commercial property have been bid up faster than rents, driving down returns. In 2005 the average cap rate for the U.S. was just 6%, the lowest it has been in decades.

In this kind of market, Merritt Sher, principal of Metrovation suggests innovative strategies such as buying an old office building and converting it to apartments in a neighborhood that’s attracting empty nesters from the suburbs. His firm has also offered low rents to startup retailers with cool products, knowing that their space requirements – and rent payments – are likely to expand in a few years. (Metrovation was an early advocate of Bed Bath & Beyond and gave the startup creative lease terms.)

Before you take the plunge, the experts have a few other tips:

* Look for cities with high occupancy rates for office and warehouse space, especially those that boast busy seaports and international airports;

* Seek out shops, apartments, and offices in urban areas within walking distance of good rail or subway connections;

* Don’t buy single-use properties that can’t be converted;

* Don’t pay more than replacement cost for older properties;

* Demand a higher return on smaller, older, individual properties than you would from a big real estate investment trust.

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