Saturday, 2 August 2014

Treating each investment property like a business

Each property must be treated like a "company" with its own profit and loss statement.
How do we analyse a company?

1.   There is profit and expenses statement. (Profit and loss statement)

This is the measurement of income from rent vs expenses incurred. What happens is people are obsessed with yield. Yields are just part of the equation, you have to take into account costs associated with the ownership which includes maintenance, interests, taxes and other nitty gritty expenses.

2.   Intrinsic Potential (Price to book)

This measures the potential for capital gains. What happens for a serious investor is he would only buy below market value which is a comparison against other similar properties and that would already made him some money when he buys. How else can we unlock the property's values? Say in a company we have a competitive advantage - think patent and good will. In this case, you can say a possibility to convert the place with an extra room to increase yield? 

A potential to subdivide? A potential rebuild? Structural plans to show that the area's up for regeneration? Yes, upgrading of the immediate environment will increase the intrinsic values.

3.   Full Control (ability to influence and make changes)

As in all business we own, when we put in our money, we do not want other people to manage the cash flow right? How do you know they can do the job better? even if you hire a professional manager as a CEO, you would expect to not give him full power and to seek board of directors approval for some changes, for example give himself pay rise. Control is a key factor for successful investment. No control = no investment. No control = gambling.

We have to treat each investment property like a company and when it can make you money on a consistent basis, that is a good "investment".

No comments:

Post a Comment