Bryan/College Station Investor’s Guide
When most people think of real estate they generally associate it with their home or place of business, but it is also a great investment that can be added to your portfolio. Almost any financial adviser will tell you that being diversified in your portfolio is the safest and smartest plan to protect an investor from rapid market shifts. When considering real estate as an addition to your portfolio there are a number of things to consider such as property type, cap rate, rental expectations, and marketability. Bryan/College Station offers some excellent investment opportunities because of Texas A&M University (TAMU). Although a rapidly growing community, our economic conditions are primarily tied to the University, making the area or at least certain sectors of our economy virtually recession proof. Regardless of national economic conditions TAMU is still bringing in tens of thousands of new students every year to the area. With the demand for student rental properties always strong, even in the worse economic times, these properties are still fairly liquid in nature. Liquid is not a term usually associated with real estate but if approached right, it can be in Bryan/College Station. Selecting the type of properties to invest in can be very confusing for the novice real estate investor. Should I go commercial, residential, or raw land? As with anything else in life one can argue pros and cons for each. You should ask yourself what is the strategy behind the investment. Do I need it to have a cash flow to support the purchase? If the answer is yes, then commercial or residential is your only true option. However, if the strategy is a place to safely invest and place funds with the hope of a capital gain in the future then raw land might be a good option. See below some of the pros and cons for each of these three categories.
Commercial – Pros & Cons
Commercial real estate has some of the largest rates of return for investors. For this guide I will include properties zoned for office space, restaurants, and retail. Some of the advantages the leases are generally 3 years or longer meaning that the investor has some long term security in the cash flow. In addition because the properties are leased to businesses the condition of the property is generally returned in better condition than residential rentals. But just because its condition at the end of the lease might be in great condition doesn’t mean there will not be substantial investment into the property to lease it to another tenant. Unlike residential properties the internal configuration of the property is entirely different from one user to the next. Don’t be surprised if a new tenant prospect asks for a build out budget to change the internal configuration to fit the specific needs for their particular business. In addition once a commercial property is vacant it can take some time to find a new tenant which will negatively affect your return. But if you are lucky enough to have a long term tenant with a successful business expect the largest returns in real estate with minimal headaches!
Raw Land – Pros & Cons
Historically land has had higher appreciations over time than already developed properties. Locating a property located strategically in an area of future growth can earn huge appreciation over time. But what if the growth pattern or direction for the area changes? Luckily raw land rarely depreciates in value, however your gain and appreciation can be greatly affected which will affect your internal rate of return. The internal rate of return is simply the time value of money. Let’s say for example, you purchase a property for $100,000 and sell it for $120,000 exactly 12 months later. Without getting too bogged down in the details let’s assume the cost to carry the property for a year was $2,500. Your net capital gain would be $17,500 or an internal rate of return of 17.5%. However, if you had to hold the property 5 years your net capital gain would only be $7,500 or an internal rate of return of 1.3904%. So as you can see when investing in raw real estate your appreciation has to be substantial and quick or the rate of return is eaten up with carrying costs and the time value of money. The largest negative for raw land is depending on its size, location, and price is generally considered the most ill liquid of all types of real estate. Because of its ill liquid nature this type of investment should only be made with a long term strategy in mind. The investor shouldn’t need to access cash from this investment to continue their current life style as it might take time to liquidate. But if you have extra cash you will not need for some time this might be a great place to invest funds.
Residential – Pros & Cons
Residential real estate I would consider to be the safest of the three options, especially in Bryan/College Station. The reason being as I stated earlier, Texas A&M University with spring 2015 enrollment at the College Station campus of 52,372 students. In addition to the elephant in the room being TAMU, don’t look past Blinn College who has grown substantially over the past decade. Blinn alone had fall 2014 enrollment numbers of 13,587 students. There is definitely some overlap between the two higher learning facilities, but if there was a 50% overlap it will still bring the student population in the area to 59,165. In addition to education, Bryan/College Station is a major medical hub for the surrounding counties. With 3 full service hospitals and a wide array of private practice physicians. How does the medical industry effect residential rentals? Remember the amount of support staff associated with one doctors office much less an entire hospital. In Texas the average age of the first time home buyer has steadily been on the rise and currently is 31 years of age. Now picture the last time you went to the doctor and determine how many possible tenants you saw working in that office. Unlike commercial leases, residential leases are generally for a 1 year term and in this market revolve around the school year. So ideally the properties are leased from August 1st thru July 31st of the following year, making them ready for a whole new freshman class! If marketed timely and correctly keeping residential properties leased isn’t an issue in our market. Pre-leasing takes place months in advance of the fall semester and once again follows the Universities acceptance notification letters. This is when the early bird parents start looking for housing options for the fall. If you currently have a tenant, which you should, this is also when you start having renewal conversations for the fall. Long and short, don’t wait until the last minute as it will increase your risk and potentially cause a diminished return on your investment. With the number of incoming students every year whose parents are looking to buy versus rent and our large investor base, liquidating the investment when you need to cash out is generally speaking the easiest of the three property types.
How to get started
If you think adding real estate to your investment portfolio is something you would like to consider, locating a realtor with professionalism and experience is the key. Does the realtor represent other investors and have a good understanding of the market? Can they calculate the capitalization rate and the internal rate of return for a prospective investment? Ask the realtor about their experience with investors and ask for a list of references which are specific to real estate investments. Unlike the purchase of a single family residence, representing a client for an investment is not just about the real estate itself but also the financial return for the investor. Your realtor should be able to provide you comp data as it relates to other comparable sales along with rental history of comparable properties so an accurate expectation can be made. At The Lester Group we strive to provide our clients with the most accurate and current information available to adequately assess the investment opportunity. We represent numerous investors and would be happy to provide a list of references upon request. If you would like to schedule an appointment to discuss real estate investment opportunities simply call 979-261-4663 or email firstname.lastname@example.org.