Timing can make or mar any decision however sound it may be, and this is very true when it comes to buying or selling a building. It is far easier for many people to make a decision with regards to selling land than it is with selling a building. A building in this sense refers to both residential and commercial properties. The timing of your purchase and of your sale determines the rate of return that you will get from your investment. Understanding timing requires clarification of a few issues.
Many investors often get confused when they hear stories of those who have made fantastic profits from real estate investment. They often assume that it is the property that has gone up in value in general terms. But there is always the need to make this clarification. From the moment you complete a building, using economic terms, it begins to depreciate. Infact, the amenities inside the building lose significant value within the first year. The property over several years will continue to lose value and when a professional is asked to give an estimate of the building value after 20 years you might be surprised at how low a value will be assigned to it.
This scenario makes sense even from a practical perspective. In most cases, after a few years, most building designs go out of fashion. The facilities in the building are outdated. Modern and more fashionable designs are likely to spring up nearby and command higher rents. The cost of maintenance and replacement of old amenities become so expensive that many property owners would simply avoid such a project. In a sense, most buildings can only depreciate more rather than appreciate in value. What goes up in value is the land on which the building stands and those focused on the building have simply overlooked this crucial fact.
The land goes up in value as a result of several factors that have little or nothing to do with the building on it. Over a period of time, if you bought a parcel of land in an area with growth potential; with or without you developing the land, it will increase in value. The rapid urbanisation of our cities, infrastructural development, population growth, inflation and several other factors not directly related to the building will ensure that it increases in value. This is the rationale behind the refrain that location is the key to property investment.
If you intend to make good money on a building, the best time to do so should be during its first decade. During this phase of the building, rent will still be competitive and maintenance cost low. This, however, depends on the structural soundness of the building. If the building was not properly built and it develops several issues early, it will depreciate faster and can result in a loss to the owner. Most property development projects target recovering their initial investments or most of their initial investments within a decade of project completion.
Once the building depreciates to a certain level, the pragmatic options available to the owner are limited. One of the options is to demolish the building and erect a building that relates more with the built environment physically and economically. In the intervening years, it is possible that the use of similar properties in that location has changed. It could change from a predominantly residential to commercial area. Another option is renovation and partial redevelopment. This is a scenario in which the building is repurposed and restructured. This could lead to a higher and better use of the property in a way that leads to greater income being generated from it.
Whenever a building has reached a certain phase in its use, it is best to make a decision to sell if you do not have the fund to redevelop or massively renovate the building to a more contemporary use that has greater economic advantage. In making a decision to sell, especially when it comes to residential buildings occupied by owners, you need to detach yourself from sentimental value. Many owners become unreasonable with the sale price due to the amount of money they have spent on the building. In many cases, these are not recoverable, especially if the amount results in a sales price that is far higher than the value of land in that location.
Ultimately, the key determinant is your short and long term strategy and how much you have to invest. Where you are thinking of higher and better use for your money without the need to further invest, it makes good sense to sell a property that has reached its prime. Where you have more money to invest, it makes good sense to redevelop or renovate the property.
Punch
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