Quick Turning vs Speculation in Commercial Real Estate
Understanding how specifc investment strategies can affect your entire commercial real estate process. A popular topic of commercial real estate is what is known as quick turning. The media has caught on to this phenomenon and generalized it. Many of the things you may have heard about quick turning are not as simple as they make them look. The general public has confused the arena of quick turning to include simple speculation. While the differences may not be apparent at first, if we delve deeper, there are several key variations.
The first way to look at speculating is that it is performed by the absolute amateurs in real estate. This is not what an experienced commercial property investor would ever do. Now, I’m not going to say that a speculator can not make any money, because they sometimes do. However, if they do, their success is more related to luck than anything. Their success depends on which market that they invest in and the timing in which they invest. Making money to the speculator is much more a game of chance than the expert investor.
The media as a whole has made the quick turning professional look like someone who is simply shooting in the dark. They make them appear to be rolling the dice and hoping for the best. In reality, this is simply not the case. Quick turning is almost a scientific process. There are specific criteria that must be met in order to succeed. If the criteria are not in place, the deal doesn’t happen. With the speculator, they very well could make a bad deal. They may not follow the same set of strict criteria that the quick turner does. It is important not to group these two very different investors together. The big difference is that speculation works in some markets at certain times of the year. Quick turning will work in any market and at any time. There are systems in place that ensure their success.
Quick turning strongly relies on fundamentals. This is why it is successful in every market. You can’t simply buy a great property in an appreciating market and hope that it will go up in value. In order to succeed in quick turning, you must find undervalued properties. This is the absolutely critical first step in any quick turn deal. You figure in the profit from the beginning. This is before you even purchase the property. The ARV (after repaired value) is assessed before you buy the property. The repair costs are also estimated beforehand. This will help to control the costs throughout the process. With these estimates in hand, a wise financial decision can be made. There is really no guesswork involved. After these estimates are made, if the profit isn’t high enough, you move on to the next property. Don’t even get involved. The speculator, on the other hand, may decide to try it anyway.
The experienced investor will take the undervalued property and improve it considerably. They will do their research and determine which repairs are the most profitable. Don’t sink your money into repairs and upgrades that will not improve the overall value of the house. Try to add a few “sizzle” features along the way. This will help the appearance of the property. The property will be presented in an attractive manner, once it is ready for the market. These factors make it more difficult to find a good deal in an active market. You can’t just settle for any property. This is why you will have to be patient in certain markets. The property you need will eventually surface. Just don’t rush into a deal under any circumstances. Make sure that the property is priced below market value. As many investors know, the money is made when the property is purchased, not when it is sold. Keep this truth in mind while looking for viable investment properties.
After a quick turn has been performed, there are several exit strategies available to the investor. Each one can be effective in different circumstances and markets. Some investors will simply flip the title to another investor quickly and make a modest profit. This is usually the fastest way to get in and get out. However, this is usually the least profitable in the long run.
Another option is to wait and sell the property at full retail value. If you are patient and don’t mind hanging on to the property for awhile, this is a good option. You managed to take a run-down property and get it back up to par. Therefore, a buyer should be willing to pay full price for it. It is no longer an undervalued property. This will usually provide more profit that the first option, although you do have to hold onto it longer. You also will have to go through the trouble of putting it on the market. Sometimes, this can take more time than you want to get results. If you choose this approach, be patient and you will be rewarded.
The last common strategy is to simply hold the property and rent it out. Sometimes, investors get forced into this strategy by necessity. If a quick turn deal goes south, you can always rent the property out in the meantime. This can create a great cash flow for you. While you may not have been planning on being a landlord, it can pay off nicely. Another benefit of this approach is that the longer you hold the property, the more appreciation will be working for you. You can get the rent money and when you do sell, the property may be worth even more. If you need to, refinancing is also a good option in this case. You can rehab the property and then get the money out through refinance.
Quick turning is a great way to profit in commercial real estate. Just don’t confuse it with general speculation. Quick turning will work in every market. Stick to the guidelines that you set upfront and do your research. You really can’t go wrong.
About the Author
Tony Seruga, Yolanda Seruga and Yolanda Bishop of http://www.maverickrei.com specialize in commercial and investment real estate. As of May, 2006, they and their partners are managing over $600 million dollars worth of new projects.
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