Uncovering profit potential in real estate

Get ready for legwork, public records research
By: Robert J. Bruss: Inman News
After analyzing why and what type of real estate you want to acquire for investment, the next step is to look for profit potential. "Buy sound, well-located property" is a time-tested technique for earning real estate profits. But I suggest changing that formula to "Buy sound, well-located property with profit potential."

EXAMPLE: Recently, the large Park Lane apartment building on San Francisco's Nob Hill, across the street from the famous Fairmont Hotel, was purchased by 87-year-old longtime real estate investor Frank Lembi for a very high price, which makes no sense based on its low financial return from rents. Most of the apartments are rent-controlled at low rents. Although it is a beautiful "trophy building" constructed in 1927, that property only has two of the three key investment profit criteria – it is sound and well located. But it doesn't offer much profit potential because the rents can't be increased to raise the net income and the market value. I understand the new owner and his son might be able to convert the property into tenancy-in-common ownership (TIC) to produce resale profits. Converting to condominiums would be extremely difficult because of San Francisco's tough anti-conversion ordinances. Unless they can create a TIC, or come up with another profitable use, "pride of ownership" is not a sound profit motive for a property like that!

What is a profit potential property? Virtually every town has lots of profit potential properties. To see how Donald Trump acquires properties with profit potential, be sure to read the excellent new book "Trump Strategies for Real Estate" by George H. Ross (John Wiley and Sons, 2005, $24.95). No matter what you think of "The Donald," Ross takes a very valuable and objective look to explain Trump's real estate investment strategies.

This great book should be required reading for every serious real estate investor. As an observer of Trump for more than 25 years and as his trusted adviser for the last 10 years, 77-year-old Ross probably knows more about what makes Trump successful than Trump himself does. The book is filled with countless examples of how Trump acquired dumpy properties with profit potential, such as New York City's Commodore Hotel (which became the Grand Hyatt at Grand Central Station), 40 Wall Street (a mostly vacant, massive office building purchased for only $1 million with an unfavorable land lease, which Trump renegotiated to create added value), and many others, then improved them to create higher market values, often by adding luxury renovation touches.

According to Ross, Trump's success keys are (1) acquire at a bargain purchase price, (2) visualize the profit potential that nobody else sees, and (3) pull everything together no matter how long it takes. Don't miss the Trump negotiation strategies, which make the book so fascinating. By the way, all the recommended books are available in stock or by special order at local bookstores, public libraries, and amazon.com.

In today's real estate market, buying an investment property and sitting back to wait for it to appreciate in market value by itself is pure speculation. Instead, savvy investors like Trump add "forced inflation" market value by adding profitable improvements, as explained in my other special reports.

HOW TO FIND INVESTMENT PROPERTY WITH PROFIT POTENTIAL. If you expect someone to call you and say "I've got the perfect property for you to buy and it's sure to go up in value at least 20 percent per year," dream on. That just doesn't happen.

Instead, it's up to you as a savvy investor to locate these profit potential properties. There are many sources, including (1) foreclosures, (2) probate properties, (3) bankruptcy properties, (4) run-down "don't wanter" properties, (5) under-used properties, (6) vacant properties, and (7) fixer-upper properties. For more details on these and other resources, please look over my list of special reports.

Every property has profit potential if you buy it at the right price and terms.

Personally, my realty investment problems are (1) spotting the profit opportunities, and (2) accepting the risk, especially if I have never done the task before, such as building a new house on a great lot. At the moment, financially I am quite comfortable. Therefore, my tolerance for risk is low. If I were just starting out investing in real estate and wanted to become very wealthy as a real estate investor, I would "go for broke" because I would have everything to gain and nothing to lose.

EXAMPLE: Recently, I spotted a beautiful view lot being sold "for sale by owner" near my home. I've had my eye on this property for years. I knew the elderly owner who died in his home there about two years ago at age 93. The lot even comes with an old one-story house on it! But rather than being a "fixer-upper," I think that house is a "tearer-downer!" It was built around 1950 and hasn't been fixed up since then. To complicate matters, there is a beautiful old "heritage tree" in the courtyard. Local construction regulations would require building a new house around that old tree. But the fantastic view of San Francisco Bay from a new two-story house would be one-of-a kind. A new luxury house on the property will probably be worth $5 million based on recent nearby comparable sales prices. The asking price for the lot with the old run-down house is a mere $2.5 million! The two wealthy brother heirs aren't very motivated to sell, unless they get their price. I spent almost an hour talking with one of the out-of-state heirs by phone. He's nice, but very tough. Is the profit potential worth the risk? That is my dilemma. If the numbers and the risk weren't so big (for me), I would tie up that property in a heartbeat. Would you take on that risk and profit potential?

Fortunately, most real estate profit opportunities don't involve substantial numbers like that (although I realize $2.5 million is petty cash for "The Donald" and he wouldn't even be interested in such a small profit potential). But it's good to think big! However, if you are getting started in realty investment, please start out with small properties. Look for potential profits in the $10,000-and-up range per property.