I generally try to avoid blanket statements such as this, but I’m confident I will never invest in the following two types of real estate:
1. A Speculative Development Project I know, I know some of the most successful real estate investors in the world have made vast fortunes and built empires through development. I just won’t be one of them. Right or wrong, here is my rationale:
- Development is all about timing and I’m not clever enough to consistently time the market over an entire investing career. Often the best time to build is when the market is in the gutter and development doesn’t “pencil” (i.e. the numbers look awful). If you start to build when the market is on fire, you’ll often miss the party before you finish construction.
- Developers often have to “land bank” to wait for the right time to build. The holding cost of land creates a negative carry investment, which eats into the project’s final returns.
- The entitlement and permitting process is expensive and tortuous. Get out your checkbook, because every consultant and city agency is going to have its hand out. The EIR (Environmental Impact Report) alone can wreck a pre-development budget (traffic study, wind study, etc.) and everything takes 2-3 times longer than your “most conservative” project timeline.
- Too much construction / execution risk. One failed development can crush a company’s reputation and balance sheet; erasing years of positive returns. Why not let others develop and just wait for a market dip to buy buildings below replacement cost?
2. A Suburban Office Property I probably wouldn’t be able to sleep at night if I owned a leveraged office property outside of a major city. Here’s why…