4 Questions That a Real Estate Investor Will Ask Before Making a Commitment

4 Questions That a Real Estate Investor Will Ask Before Making a Commitment There’s no doubt that real estate development is a lucrative investment. From developing land for residential or commercial use to restoring and converting older structures for new purposes, there are plenty of opportunities to generate a reasonable return in the short or the long term. How does they typical real estate investor go about determining if an opportunity is worth the time and effort?

Here are four questions that the investor is likely to ask before making a decision.

What’s the Projected After Restoration Value?

In order for the deal to be successful, the property in question must increase in market value. That’s true with any type of development or restoration deal. As an investor, one of the first concerns is how the property will perform once the development, conversion, or restoration is completed? Will the effort result in property that’s worth considerably more? Can the property be expected to generate profits long after all the construction and other costs are settled in full? If so, the project could be worth exploring in more detail.

Who Else is Investing?

It always pays for the real estate investor to know who he or she may be taking on as a partner.

How many investors will be supplying the capital for the upcoming project? Are they people that the investor has paired with in the past? What are their thoughts about the project? The ability to discuss the merits and potential with those who are also thinking about taking on the risk will go a long way in deciding if this is a deal worth pursuing.

When Will the Project Begin to Generate Returns?

Most investors understand there will be a period of time before the project begins to yield returns.

For example, a renovated office structure may fill up quickly, based on the location, building features, and other aspects. In this scenario, a building that’s fully filled with tenants could begin to generate enough revenue for investors to see returns sooner rather than later.

At the same time, converting an aging office building into apartments may or may not result in people clamoring to fill each of the units. It could take a year or two before all the apartments are in use and leases guarantee they will remain that way for the next few years. This type of project may take a little longer to begin yielding returns to the investors.

Accurately projecting the time frame allows the investor to decide if he or she is willing to wait that long for returns to materialize. If so, that’s great. If not, checking out other opportunities makes sense.

What’s the Worse Possible Thing That Could Happen?

While much of the focus is on the best possible result, it pays to step back and determine what factors could lead to losing all or part of the investment. Could a shift in the stock market lead to failure? Perhaps a recession could mean that tenants begin to clear out, effectively reducing the income generated by the facility. Could the investor weather the issues until they passed and the property became profitable again? Understanding what could undermine the deal and what it would mean to the investor is something that must be considered closely.

There’s no such thing as a real estate deal that’s right for every investor. Consider all the facets of the opportunity and relate them to your personal goals. Doing so will help you determine if the risk involved is likely to be offset by the potential returns.