Introduction
After purchasing an asset, the next stage is to prepare it for resale. This is known as stabilisation of an asset and can contain important tasks like construction, restoration, listing the property, and making a sale. The scope of stabilisation will depend on the type of investment along with the funds available for development. Construction and restoration are the most challenging part of a real estate investment. Multiple aspects of how contractors and developers work must be known for the effective utilisation of time and resources at this stage. Once the property is ready for sale, the next task is to list it on online real estate marketplaces or with real estate agents or brokers. Finally, exiting an investment at the right time can make all the difference between net profit or loss. Continue reading to understand the fourth stage of real estate investment, stabilisation and exit.
The Stabilisation Process
Once a property has been purchased or financed, stabilisation begins by either construction or restoration. The process largely depends on the scope and type of investment. Determining how much construction or restoration is required can impact costs, timing, and how much contingency funds must be set aside by the investor. Construction and rehab can be tricky as various factors need to be checked before getting into a contract with any developer or builder. It is necessary to obtain multiple bids from different developers to get a sense of exactly how much it will cost. Doing this will also lead to greater exposure as not all developers are equally skilled and equipped to execute the investor’s plan. It is also necessary to check the developer’s past projects and reviews of their prior clients to better understand how they work. Once construction and rehab are finished, the asset needs to be prepared for sale. The goal is to get the property ready, list it on multiple property portals, and ultimately make a sale.
There are two different types of investments, namely, properties related to rental income or operating assets such as hotels and commercial malls. In the case of income-generating properties, stabilisation will come from getting the occupancy levels and rental rates to market levels. If the market is considered stable at an occupancy rate of 80 percent or a certain amount of rental income is expected from a similar property, then the property being advertised must also be at the same occupancy level for generating market interest. Getting a property leased out at a higher rate will also ensure a higher price because it can achieve a higher rent. Therefore, stabilisation includes getting the tenants on the property, getting the right market rent, and getting the occupancy to a level that is equal to the market. If the property is an operating asset, the investor must also consider key performance indicators used to gauge such properties. For example, turnover and operating costs must also coincide with similar properties in the market. Lastly, the property also has to be listed on reliable real estate portals or with established agents or brokers. This is a crucial step as many properties have the potential to generate profits for their investors, but weak marketing strategies fail to generate the level of buyer interest that is required to sell them.
The Exit Stage of Investments in Real Estate
The final stage of the investment process is called the exit phase. This is the part where returns on the investment are realised in terms of profit or loss. The net proceeds are calculated by subtracting the closing fees or costs associated with making the sale from the actual sale price. But what was the performance level? It is important to check how the investment performed in terms of predicted and actual values. An analysis can be based on several different models, and an investor can keep track of the success rate of an analysis method by comparing the internal rate of return and net income value for different properties analysed using different methods after the exit stage. This will ensure that only those methods which provide the highest profits are used in future ventures. Retrospectively, investments made in diverse markets can also provide insights into market performance and forecasting of future sales. The last consideration during the exit stage is the distribution of profits between investment partners in the case of partnerships. This marks the completion of the investment process in real estate.
Conclusion
Purchasing a real estate asset is only half the process of making a profit on an investment. Once a property has been purchased, it needs to be stabilised according to market conditions for it to sell at a higher price. Construction and restoration are two main processes used to enhance a property, after which it needs to be stabilised. Stabilisation includes getting tenants on a property, getting the right market rent, getting the right occupancy levels, and factoring in other key performance indicators for properties. Once the property has been stabilised, it needs to be listed on an online property portal or with real estate agents or brokers. Exiting is the last stage of an investment and is often related to making the sale and evaluating the key investment indicators such as internal rate of return and net profit income. Following this four-step strategy covered in our blog series can ensure a safe and reliable investment method for investing in real estate.
Bibliography
Finance. (2021). Navigating the Nuances of Investment Due Diligence. Retrieved from https://www.toptal.com/finance/due-diligence-consultants/investment-due-diligence
PropertyGuide. (2020). Registration and Transfer Costs – Explained. Retrieved from https://www.privateproperty.co.za/advice/property/articles/registration-and-transfer-costs-explained/687
RealEstateLawyers. (2021). What Happens if a Seller Fails to Disclose Defects When Selling Property? Retrieved from https://www.realestatelawyers.com/resources/real-estate/purchase-sale-agreements/what-happens-a-seller-fails-disclose-defects-whe
Souerby, J. (2018). Beware of Personal Property In Real Estate Sales. Retrieved from https://cordonrealestate.com/personal-property-in-real-estate-sales/
Research Questions
How does stabilisation impact the investment process?
How to exit from investments?[/fancy_box][fancy_box box_style=”color_box_basic” icon_family=”fontawesome” image_url=”7085″ box_color_opacity=”1″ box_alignment=”left” border_radius=”default” image_loading=”default” icon_fontawesome=”fa fa-envelope-open” icon_size=”60″]
Key Takeaways
Stabilisation of an asset and can contain important tasks like construction, restoration, listing the property, and making a sale.
Construction and restoration are the most challenging part of a real estate investment.
Exiting an investment at the right time can make all the difference between net profit or loss.
In the case of income-generating properties, stabilisation will come from getting the occupancy levels and rental rates to market levels.
Stabilisation includes getting the tenants on the property, getting the right market rent, and getting the occupancy to a level that is equal to the market.
An analysis can be based on several different models, and an investor can keep track of the success rate of an analysis method by comparing the internal rate of return and net income value for different properties analysed using different methods after the exit stage.[/fancy_box]
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