For investors, withstanding the ebbs and flows of the real estate cycle is par for the course. But how do you choose a property that can do the same?
Construction consultant Marco Ganassini has been in the industry for almost 30 years, and says there are four fundamentals to consider when picking a correction-proof property that will attract tenants, mitigate risk, minimize expenditure and, most important of all, provide cash flow.
1. Avoid picking a property solely on price-point - no matter how good a deal it may seem
"The biggest mistake people make is when they chase prices is they look for property in areas where prices have been escalating, especially in the recent past, rather than looking at the fundamental value of the property,” he says. “Primarily, you should be looking for a property that, if and when a correction occurs, you won’t be forced to sell.”
According to Ganassini, there is one principle thing to consider when picking a correction-proof property.
“The whole concept surrounds mitigating risk,” he says. “You’re looking for property that has intrinsic or fundamental value, and we base that on return on investment and cash flow. You want to have some margin of safety.” He continues, “If unforeseen expenses occur, if your revenue stream gets affected, you want to make sure you have the cash flow or capital to cover it. To do that would include not over-leveraging yourself, and finding a property in already excellent condition.”
2. Look for a building with components that are 5-10 years old
Finding the right market is key, but looking at the construction of the property is equally important. From a technical point of view, Ganassini points out that most building components have a lifespan of 15-20 years.
“If you’re looking at the technical aspect of a property, you should be looking at components that are no older than 5-10 years old, so they’ve been tried and tested, but still have enough life span left to minimize expenses caused by repairs,” he explains.
3. Pay careful attention to any room with a plumbing system to avoid surprise expenditures
The main components investors should look out for is the roof and the HVAC system. For the interior, he advises to pay careful attention to the bathroom, kitchen and laundry – essentially anywhere where there is a plumbing system.
4. Consult with a team to assess the property’s physical longevity as well as potential for consistent cash-flow
When deciding on a property, investors should also remember the four main players that can help assess a property’s long-term worth. While it’s easy for investors to fall in love with a deal or a property, seeking the expertise of other parties can help assess the transaction from numerous standpoints and provide impartial insight.
“One key player is your real estate agent, the second is a building inspector who will give you the lifespan estimate of the different building components, which will help you budget for the future and give you a general assessment of the property’s longevity.
Last, but not least, consult a mortgage broker and a lawyer. Ultimately, it has to boil down to the right property, right location, at the right price, he says.
Written by Jemima Codrington
Jemima Codrington with Marco Ganassini, ACI. AScT. BCQ. B.Comm., renowned home inspector, building consultant and real estate investor.