Previously we talked about the Do’s and Don’ts of real estate investment. Since then clients have reminded me of what to consider before you get to that stage: if you’re new to real estate, what real estate are you supposed to target?
We’ve talked about this before, but as a refresher, it is our belief for everyone that the base of your real estate portfolio should be made up of safe properties. These are prime or near prime properties – properties which have sustained high levels of demand. These might not be sexy investments, but they are definitely places that everyone wants to live and they are defined by 5 variables:
- Highly sought after location
- Demand from high quality tenants
- Excellent amenities and management
- High quality modern finishing
- Close to transport and major roads
But how do you determine or find these kinds of properties?
Well, it turns out, it’s a lot more obvious that you might think.
- Property with the qualities of prime property as easy to figure out – Even if you’ve lived in Cebu for only a few months, you will understand the places where most people like to hang out. Places with a sustained high level of foot traffic, these are also the places which have all 5 of the variables of prime property. IT Park & Ayala Mall are the most obvious choices.
- Prime property is not cheap but neither are their returns – I’ve asked this question to dozens of investors: over the last generation which class of property has grown faster? Prime properties or opportunistic properties (properties that need a bit of work, or are in less than ideal locations). Every investor has said “opportunistic”. It seems to make sense because of it’s name, but would it surprise you that in almost all cases Prime properties have outperformed opportunistic properties by roughly 30% over the last generation? It all boils down to much stronger fundamentals, which will always assert themselves over time. While prime or near prime properties will cost more to buy upfront, their returns will more than cover the money you might save purchasing an opportunistic property (not to mention the headaches).
- Prime property should make up the bulk of what you own – a good rule of thumb is to have at least 60% of all property that you own be of prime or near prime grade. That’s assuming you’re 25 years old. The older you become the more of your portfolio should be made of prime property. So when you’re 40 years old, 75% of your portfolio should be prime or near prime. By the time you’re ready to retire at 65 years old, 100% of your portfolio should be prime. Most people understand the need to minimize their exposure to risk and maximize income generating opportunities as they get older and time becomes a more precious commodity. What most people also forget to do is to re-balance their portfolio to reflect these changing expectations.