Investors regularly ask me the question, “Will this property be a good real estate investment?”
Let’s examine the theory of good and bad real estate investments.
I purchased some parcels of industrial land 35 years ago in an area my partners and I thought would experience steady growth. The growth we anticipated did not materialize as we expected. The City did extend sewer and water services to that area of town, but even with those services the boom we expected did not happen. My partners and I still own the land all these 35 years later. There has been growth and development near our property but it has not reached us yet. We are still in the path of progress!
One of my clients built and leased a restaurant building to Denny’s in Des Moines, Iowa at a booming freeway interchange in the 1970s. Denny’s operated successfully in that location for many years until traffic congestion caused the City to construct a median in the middle of the street in front of the property. The new median probably improved traffic safety, but it substantially cut off the flow of hungry customers to Denny’s. As a result, Denny’s closed the store and my client was left with a vacant building he could not rent to another restaurant operator. Bad real estate?
James S. Black, the founder of our company, once said “There is no bad real estate as long as you live long enough!” Yes, there are real estate investments that will not perform as expected, but there really is no bad real estate. Time and real estate combined can produce amazing returns. Sometimes unexpected circumstances push those time frames and returns years into the future. Real estate is just like any other type of investment we make; some investments just don’t perform as we expect them to.
My experience from making numerous real estate investments over the years is that you will have a few properties that will perform better than expected; the majority of the properties you invest in will be nice, solid, steady producers; and a few properties will not turn out as planned.
So, what about the two example properties I mentioned above? Well, like with anything in life, you try to make the best out of what you have to work with. The good news is that the land mentioned above that we’ve owned for 35 years has been debt-free for a long time and the holding costs are nominal. We were even able to sell a crop of hay from the property for many years, which generated enough income to pay the real estate taxes. The land has appreciated in value and continued growth in the surrounding area will eventually allow us to sell or develop it. It will not be the greatest return I have obtained on a real estate investment, but we should end up with a return of our capital and a small profit. So, a long-term perspective is important when investing in real estate.
The property in Des Moines did provide the owner with a secure and steady cash flow during the original term of the Denny’s lease. When Denny’s left he still had a well-located piece of land at a high traffic major freeway interchange. This land was well-suited for redevelopment as the former Denny’s building was at the end of its useful life. Today the median is still in the street in front of the property but the traffic count has grown steadily, which has supported the redevelopment of the land into a C store with gas.
Some real estate investments will not perform as we expect them to, but over time, “If you live long enough there is no bad real estate!”
Jeff K Johnson is the author of the real estate investing book Cash Flow Forever
Jeff K. Johnson is the President of Black Commercial, Inc., one of Spokane’s largest property management and commercial real estate companies. Jeff is a licensed REALTOR® and has worked in the real estate profession since 1975.
Jeff specializes in the sale, leasing, and development of office buildings. Much of Jeff’s work includes assisting Fortune 500 companies with the acquisition and disposition of corporate real estate. Jeff is also the managing general partner in numerous real estate investment partnerships. Prior to moving to Spokane, Jeff grew up in Iowa and attended Waldorf College in Forest City. Jeff has consistently been one of the top producing commercial real estate brokers in Spokane.