Don’t Buy the Hype, Buy the Fundamentals

I often talk about how Sacramento’s central core, aka THE GRID, is driving higher rents and property values. If rents weren’t going up, we wouldn’t have market rate housing like Powerhouse 16 developed. If you plan to buy an office building or office condo, focus on the fundamentals.

When advising an owner user client in the purchase of a property I recommend that my client, in addition to typical purchase decision items,  consider the following:

• What is the exit strategy? If you need to move, will you lease the property or sell it? Is the property single purpose, or will it appeal to a broad base of potential occupants?
• What is the replacement cost? What would it cost to build the building from the ground up versus the total cost to buy and occupy? You might buy a building for what seems like a “deal”, but after you finish renovating, your total cost could exceed replacement cost. That’s OK if the property works for you; hopefully market forces will support the investment over the long term.
• What is the Property worth as a leased investment? Just because you are an owner user doesn’t mean that you should pay an over market price for real estate. Certainly, as an owner user you can justify paying more than what an investor would pay, but be sure to consider what an investor would pay if the building was valued as a leased investment (at market rents.)

Owning definitely has it’s positives, but when the price gets too high, you might be better off as a tenant.  If you end up leasing, the owner gets to take care of maintenance, taxes, capital improvements and assorted management headaches. You can focus your energies on building your business!