The 2nd Element - Research & Strategy
Warren Buffet once stated, 'Whenever we buy common stocks for Berkshire's insurance companies (leaving aside arbitrage purchases), we approach the transaction as if we were buying into a private business. We look at the economic prospects of the business, the people in charge of running it, and the price we must pay.' This basic principle sums up a lot of what made Warren Buffet so successful.
He didn't just buy into opportunities because they seemed likely.
He actually closely looked at earning prospects, financial health, management, fundamentals, philosophies, and employers of businesses he was thinking of investing in. Real estate entrepreneurs need to be just as choosy and just as careful about the properties they buy. Even if you hope to just rent out, and/or buy, fix, and flip property, you should still investigate it and your marketplace with the same vigor as you would investigate a home you were putting in your entire life savings into.
When it comes to research, what are the demographics of the marketplace? What cycle is it in? (expansion, contraction, or absorption)? What investment strategy should you apply to yield the greatest amount of cash profits in the next 6 to 12 months? What's the competitive landscape like? Are their 'clients' who want the services your investing business is going to offer? Where are you targeting properties in the market? What is the acceptable price range suited for your needs and why? What neighborhood is it in? Has there been any serious damage to these properties in the past 10 years? What are its real condition? What are the average earnings potential per deal?
The 3rd Element - Business Opportunity (Market Size)
Warren Buffet is known for purchasing stock in companies, or entire businesses for that matter, whom have a significant market share in their industry.
As his portfolio includes companies such as Gillette, GEICO, Coca-Cola, American Express, and the Washington Post, he has a broad reach over a number of industries that help expand and grow the investment portfolio of Berkshire Hathaway.
How this translates to you as the solo, investment business entrepreneur is you need to identify the particular price points of properties in your target area, determine how inventory there are in the vicinity, project the probability of how much of this inventory you can buy at a substantial discount (with a minimum 15% profit margin at today's Fair Market Value or Retail Price), and precisely how you can expand your business into other cities and markets over the next 24 months.
Give yourself permission to go BIG. Then abstract from that the projected profit margin from your business and you'll see just how large (and profitable) this can be for you.
Simply put, make sure that the properties you are purchasing or investing in have a significant position in their neighborhoods. For example, if you are buying residential properties, make sure that you're buying in a place where there is a demand for residential rentals or purchases.
If you are purchasing an investment property, make sure that there is a local clientele in place for that property and describe those items here. (Tip: spreadsheets help. You'll have fun with it...go to your local Chamber of Commerce and get a 'Business Relocator Kit' which will have this statistical and demographical information).
