If you’re a real estate investor, one of the most difficult decisions you have to make is deciding what to do if you’re presented with a solid business plan by a business group looking for private investment for a real estate business, particularly one that involves the creation of a new building project.
Let’s assume, for the sake of clarity and simplicity, that you’re being you’re invited to invest in a strip mall. You know from experience that it’s highly likely that you'll find plenty of entrepreneurs eager to open up their own store, as well as many existing business owners who will be motivated to either find a better location for their current business or who are always on the lookout for opportunities to expand to a new location.
If this is the case, should you go for it?
Not necessarily. While you may know, like, and respect the integrity of the people asking you for funding, the business plan may not be as solid as it looks on paper. It may have some flaws that nobody has yet detected. If the business group approaching you have not had their project idea vetted by civil engineering consultants, it might not be a good idea after all. Perhaps, there is a problem with the site selection or the design is flawed or there are restrictions on permits in that particular county for that type of project.
Let’s look at some pros and cons on whether to accept or decline the invitation.
You could make a lot of money. If it’s a commercial property, the annual return will be much higher than for single-family homes.
You’ll be working with professionals, usually limited liability corporations, not individuals. Everything will be done with a business mentality. From hiring the right firm for the construction to managing and operating the property once it’s complete.
You won’t be dealing with temperamental individuals but with courteous, professional people who understand how to build and maintain a business-to-business relationship.
1. Slow return on your investment.
It will take time for you to get your money back and even longer to know if you had a good return on your investment. You could put the same amount of money into the commodity markets and get a far faster return on your money.
2. The future is unpredictable.
Things could go wrong. The government might enact new laws, raise taxes, or put some other barrier in the way of the project’s success. The economy might change. In short, the political and economic future might not be as rosy as it looks right now.
Additionally, the project managers and the construction company could make expensive mistakes. For instance, project scope creep or inefficient material purchases could increase the time and the cost of the project.
If you were a stakeholder in the building of the Sydney Opera House, back in the late 50s it would have looked like a good decision. The plan looked good on paper and the project was headed by Danish architect Jørn Utzon who had a sterling reputation. It was scheduled for four years and budgeted for about US $ 5 million (AUS $7 million). However, it took 14 years and ended up costing about US $77 million (AUS $102 million.)
Making a Decision
Any type of property, commercial or residential, can be a superb investment, although commercial properties tend to involve less risk and a higher financial reward. With single family homes or rental apartments, you may or may not get tenants who think it’s a fair price. With commercial property, your chances of success are higher.
The only way to make a meaningful decision is to do your own thorough research on the feasibility of the project. Avoid being rushed into making a decision. Additionally, don’t simply base your decision on whether you’ll lose money, break even, or come out ahead financially.
Another factor to consider is that your reputation as a real estate investor will grow because the size of the project will be in the public eye. Since your decision will improve the community in many ways, you will be thrust into the limelight. You may be interviewed by local newspapers and business magazines about the investment, and you'll probably have your name mentioned in association with it. As a result of all this free publicity, you’ll be among the first investors to be contacted when businesses are looking for private capital for their projects.