Buy & hope is not a real estate investment strategy
I went to look at a potential multi-unit infill investment lot last week.
It had been rezoned and plans for a 5-build had already been drawn up.
I ran the numbers to see if it made sense to buy the lot—starting with the potential sale price of the to-be-built units. There was a very suitable comp only .3 mi away that sold earlier this year.
I accounted for known costs starting with commissions, build costs, holding costs, profit for investors, and the land acquisition itself. There are other costs involved—but I was doing back-of-the envelope calculations here to see how much was (or was not) left after major costs were factored in to see if I wanted to dive even deeper.
I quickly saw why the lot was still for sale and why many investors had passed on it: Even though the land was in an up & coming area of Nashville, had already been advantageously rezoned, included pretty cool building plans, and was being offered at a decent price, it was nearly impossible to build the project as-designed and sell it on at a profit.
Other build options for the land exist, of course. But to get the maximum out of the project, you would need massive and rapid appreciation and your project would have to go nearly perfect from start to finish.
That’s a lot of hoping & praying for tying up this kind of money.
I can sit on my butt, push some papers around, and lend that same amount of money to multiple investors and collect 15-19%+ annualized without leaving my house.
Why would I risk that money on a development deal that may/may not break even or sell for barely more than it costs to build?
That’s not my idea of a smart investment strategy.
Taking risks is a very good thing. But I use data to quantify risk vs opportunity and poke holes in deals to find reasons not to do them. When I cannot find holes (or when it’s really tough to do so), I know a deal is worth pursuing.
Of course, any project will likely appreciate and be worth more one day. But I don’t want to hold a note or have my money tied up for years waiting for that.
That’s buy & hope.
I prefer buy & hold.
The difference between them is only two letters. But they couldn’t be any further apart.
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Stephen Parker, Nashville Real Estate Investor & Realtor®
Buy, Sell, Invest, Relocate
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