As you look at acquiring property, you’ll want to be aware of different types of real estate investments. Some are more passive in nature, such as a long-term credit tenant that might not be management intensive and will provide cash flow. For others, real estate investors might look to make significant improvements and add value. In these cases, the returns could outperform the market.
If you’re looking to increase the value of a property, that could mean physical upgrades, improving tenant quality, optimizing leases, or even changing the property’s use entirely. From my experience, I’ve seen that the most successful investors don’t wait until after closing to start. They begin planning and executing well before all the papers have been signed.
1. Discuss Your Vision
As you consider a property, you’ll have various steps to complete related to due diligence, financing, and other legal matters. In addition, I always suggest meeting with professionals about your repositioning plans. This might involve connecting with architects and engineers if you have major renovations in mind.
This can start as soon as you sign a contract. Typically, you’ll have up to 90 days or more to close on a property. You can use this time to put your repositioning plans into place.
You might start with preliminary discussions. Think through the upgrades or changes you want to make. Are you renovating a lobby? Subdividing a retail space? Adding new amenities to a multifamily property? You can aim to finalize designs and gather feedback so that you’re ready to act as soon as you take ownership.
2. Set Up Property Management
You may have a chance to line up your property management team and start working with them. If you’re going to have a third party manager, you could get them involved in reviewing leases. Then once you take over the property, they could send out notices to the tenants that you’re taking over service contracts. They might be able to work on tasks related to the operations of the property, so that on the day of closing you can avoid confusion. A managing agent can help coordinate bills being paid and a smooth transition when you close the deal.
3. Research and Vet Tenants
If your strategy includes leasing space, you can start identifying and negotiating with potential tenants while you’re in contract. This can be especially helpful with retail and office, along with mixed use spaces.
You might begin discussions, tour the space, and even secure Letters of Intent (LOIs). This can also strengthen your position with lenders as you finalize financing. Having tenants lined up shows momentum and reduces perceived risk.
4. Work With the Seller When Possible
In some cases, a cooperative seller will allow you limited access to the property before closing. That might include touring with your contractors, taking measurements, or reviewing building systems. In the best-case scenario, the seller might even permit you to begin early design submissions. Keep in mind that until you own the property, there are legal limits. Most municipalities won’t let you file for permits until the title is in your name. That said, you may be able to take other steps, which might include developing drawings, finalizing the design, and getting ready to file the day after you close.
5. Set up Construction
If you plan to carry out renovations, you can look at construction costs and vet contractors during this time. There are two common construction contracts you’ll find. These are guaranteed maximum price contract and open shop contract.
For a guaranteed maximum price (GMP) contract, you’ll be working with an all-in number. This caps the amount you’ll spend on the project. You’ll often see a delivery date, with the understanding that the project will be completed by the listed day. If it is not finished by then, the contractor may owe a penalty. An early delivery could include a bonus.
An open shop contract doesn’t include a capped number for the project cost. It outlines that bids will be placed for each part of the construction. This gives plumbers, electricians, and others the opportunity to offer their best price for their services. You may be able to reduce the expenses for the total work. At the same time, you could end up paying more than expected by the time the project finishes.
Your goal for the property you’re acquiring likely involves a certain return, and investors and partners will be interested in results too. Every step you can take during the closing period will shorten the time between the final paper signings and the completed renovations. You’ll be able to act quickly once the closing is completed. You can then start renovations, sign tenants, and carry out steps to generate returns that outperform the market.
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