Target Properties with Strong Value Growth Potential

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The return on real estate investments has two components. An income component, that is, the return from the income (mostly rental) the property is producing, and an appreciation component, which represents the growth in value from the time of purchase. Typically, in a competitive real estate investment market the income component ranges from 6 to 10% depending on the type of property (apartments, office, retail or industrial/warehouse). Thus, investors aiming at high returns, above the 10% mark, need to target properties with strong value growth potential. One category of properties that fit within this targeting framework includes properties with potential for significant improvement of their accessibility, visibility, and traffic exposure.

Large urban transportation projects, such as new light transit systems, or the expansion of existing ones, new freeways, highways, and bridges change considerably urban traffic patterns, shifting heavy traffic from one street to another, and creating new heavy-traffic corridors and intersections. Properties found on either side of these new heavy-traffic corridors and intersections will experience a dramatic improvement of their accessibility, visibility, and vehicular traffic exposure. Thus, commercial properties or properties in other uses that can be converted easily and at low cost to commercial use, should appreciate considerably as they become exposed to heavy traffic and, as they become more accessible from every location in the metropolitan area. Be aware that residential properties about to be exposed to heavy traffic will lose value and should be avoided, unless they can be easily converted to commercial.

The effect of newly created transportation corridors will be felt, not only by properties that are on the corridor, but also by clusters of uses and sites that are in close proximity to it. For example, office building clusters and vacant commercial sites that gain proximity to newly constructed freeways, major transportation arteries, and light rail system stations should also gain considerably in value, as their accessibility to clients and labor within the metropolitan area improves significantly. Jonathan (2002) reports that office rents at locations adjacent to Toronto’s light rail transit stations climbed 30% above the city average. Similarly, residential areas, whose broader access improves significantly as a result of close proximity to such new corridors, should also register significant gains in value.

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In sum, real estate investors should pay considerable attention to announcements of new large transportation projects, try to idenify areas that are bound to benefit the most from such projects, and carefully target properties in those areas.

Petros Sivitanides has more than 14 years of experience in real estate investment consulting and he is the author of Profitable Real Estate Investing: A Value Growth Approach Website:http://www.property-investing.org

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