Andrew Vaughey, Real Estate Investor

Author: temp

Capital Investment in Infrastructure is always an interesting component of Real Estate investing. In my experience it can be one of the most positive influencing factors in property appreciation, however, it can never be taken for granted. During the examination period of a potential investment an investor discovers that sewer and water is going in or that a new road is being constructed, and without a great deal of consideration the investor jumps and secures as much of the surrounding property as possible regardless of the timing.

It is this investment timing that I am most interested in here today. To help determine the best timing of an investment I find it helpful to differentiate the type of infrastructure change. First, separate the target properties into Direct and Indirect Impact Investments. A direct impact investment is one that is immediately impacted by the announcement of an infrastructure project. An Indirect Impact Investment is one that is not immediately affected by the announcement or the early stages of the infrastructure but its value will be significantly improved by the completion of the project.

Take the example of two properties located outside of Raleigh, North Carolina, the home of North Carolinas Research Triangle Park. The first property (direct impact property) is located contiguous I-85 at an intersection with a secondary road. The second property is approximately one-half mile away from the intersection and has frontage on the secondary road leading to the I-85 intersection.

This area is considered a bedroom community for the greater Raleigh area and is in itself growing at a rate faster than Raleigh and Durham. The I-85 corridor had been developing well prior to the announcement by the North Carolina DOT regarding the re-construction of the highway from Raleigh north to the Virginia State Line, (40 miles of construction). This project would eventually take eight years, cause major delays, re-route traffic and have a major impact on the economy and expansion of the entire corridor.

The first response of most investors was to move out of the area and invest in other locations. However, for those who analyzed the potential and adjusted the price, timing and selection of properties in this area turned out to be a very profitable investment. Let me explain.

Direct Impact Sample Analysis

The first property is adjacent Interstate 85, in a very active market and priced around $100,000 per acre prior to the highway re-construction announcement. Property value was tied directly to business activity generated by its access to Interstate 85. Property value was evaluated as a Direct Impact Investment over the 8 year life of the infrastructure project. The duration was determined based on project length from announcement through completion

Upon announcement of the project the value of the property dropped from $100,000 per acre to about $70,000 per acre and remained at that level for the first three years of the investment.. In the fourth year of the project life the property began to gain in value at about the same rate as other properties not aligned with the highway, still there was no positive influence caused by the highway project. The primary growth in value came toward the end of the highway project, eighteen to twenty-four months from its completion.

Indirect Impact Sample Analysis

The second property is well off the Interstate and has little or no value related to the interstate driven commerce. Its initial value was $12,000 per acre and continued to grow at a rate consistent with value driven by non-interstate factors. However during the last two years of the highway project the value grew substantially and was in fact pulled by the Interstates commerce generating capability. The transition from no impact to high impact was created by the general maturing of the area and the much increased commerce generating capacity of the improved infrastructure.

It is key to notice that the quality of the investment is higher for the land investor if the investment is made in the Indirect Impact Parcel and the timing of the investment can make a massive difference in the rate of return. In comparing indirect impact to direct impact properties, the compounded rate of value growth with respect to the year invested through to the end of the project showed substantially higher returns for the indirect impact property.

Perhaps the most intriguing aspect of these results is that for the indirect impact property, years four and five were outstanding; however, yer six fell to the lowest level of the project life. This is primarily due to finite limits of Interstate 85 to continue to drive value. Most of the growth in value was related to the investment in the highway capital improvement. The investment in Interstate 85 over the long haul created a gain in revenue generating capability which forced the property value upward. It is to be noted that growth in the interstate traffic after the completion of the project is slow and its ability to create additional value would accordingly be slow.

Until a commerce center is established at this intersection neither property will see really strong growth . With capital investment in a commerce center there will be value growth similar to the level growth we saw with the highway; however, it will occur in a shorter cycle time. Hence, I would argue that the risk component would be higher and the timing would be even more crucial.

Author: Seth Joiner

Regardless if we know intimately the area we would like to invest in or if it is across the world we need to understand that in rental markets just like housing markets it is based on supply and demand. If there are a small number of renters and a large number of properties available then we have an imbalance in the market, which always benefits one side over the other.

So then we need to ask what are the factors that we can look for to discover what the supply and demand are for any given area? There really are four main factors to look at when trying to figure out if we should invest or not.

Location

We always hear about location, location, location and to some extent I would agree. When we are talking about real estate we need to look at it from a little different perspective. Do people want to live there? Is it on a busy street? If it is on a busy street then our rental signs will be highly visible and potentially can save us money on advertising the property. Is there a unique quality to the property? Is it on a golf course, great mountain views or on the water?Employment trends

Next we need to find out what the local employment trends are doing. Let’s face it people live where they can find a job and if we can find out if there is job grow or is the job market in decline then we can understand what the market is going to do. Is a big employer leaving or coming into the area?

Now we can say the people might consider commuting great distances to go to and from work, but that will only take us so far. We might be able to draw a 30-45 minute window around the major employers to discover the safe distances, but if we don’t want to gamble with our money then we need to be realistic and find our properties close to where the employers are.

Population growth

Again we need to take a look at the trends. Is there population growth or is the population in decline? This is also has direct correlation to employment so we can use both of these numbers together to discover if our market is right to invest in or not.

Often times the population has a tremendous effect on job growth even though it might be temporary. As in times of great population growth there are new jobs created around the building industry itself to compensate for the population growth. Construction jobs, architects, engineers, real estate professionals etc are all directly affected in a population boom or bust.

Inventory

Even in boom times when every thing is going well there still might be a problem of over build. In other words there are too many houses for too few people to live in them. We need to be very aware of the overall industry and have team members that can help us know what the market is doing.

Property managers and real estate brokers will be invaluable in telling you what the vacancy rates are (high vacancy rates are a clear sign of over build), what the market rents are and what are the different promotions going on to get people into properties. When there are a lot of promotions then you know that supply out paces demand.

The funniest part about all of this is that the market regardless if you are looking in your back yard or across the country is constantly changing and you have to keep up what is happening now and then far into the future. The more that you know the better prepared to make a solid educated decision regarding when or where you should invest.