When I look at a new building to buy, I almost always start by imagining it burned to the ground. Am I some kind of psycho?
No, I’m not (at, least, not that I know of). I imagine my building in ruins because it helps me focus on the most important aspect of any property: the land.
Particularly in cities, over the long term, land always increases in value. Why? Because the population grows every year but the amount of land doesn’t. So the demand for land increases but the supply is constant. I got a C+ in my college economics class, but even I know that increasing demand plus limited supply equals increasing prices.
You can always repair or replace a structure that is falling apart. But there is nothing you can do about a small or badly positioned parcel. And, on the other hand, it’s really hard to screw up a deal where the land is good – someone will always want to buy it from you.
So, when you’re looking at a property, imagine the building burned all the way to the ground. Think: Would I want to own this piece of land? What does the topography and the local zoning allow me to build on this land? Is the neighborhood in which this land is situated getting better or worse?
The best apartment deal isn’t necessarily the one with the absolute highest cap rate. Often, it’s the one with the reasonable cap rate plus the upside associated with an absolutely killer piece of land.