Investing Strategy & Tips
Land Usage And Real Estate Investment - Part II
By
Jan 8, 2006, 19:11

I've always felt that buying a unique property in an established area was much better than buying something that made you feel as if you were part of a mule train. A neighborhood where the properties are roughly the same size, quality, and price but are different in design has a much more desirable aspect than a monotonous tract development, because it gives property owners a feeling of individual expression. When the neighborhood is established and has a certain reputation, people of the same income and socioeconomic status will generally go there.

The right location is the key to the whole thing. But you need the foresight to see the added potential. When you have a piece of real estate that is well located, it's probably better to own that property than build a new one if you're not sure what you're doing. The reason is that you have a past performance of what has happened to an existing building to study. With a new building, that type of information doesn't exist. You only have similar, newer buildings to refer to.

Generally speaking, if you have a tract of homes in a desirable area, such as Las Vegas, Nevada, or Riverside California, the value of those homes will reach their peak when the last property is sold. At this point, people who bought in first begin to want something more desirable and start looking for something else. If the neighborhood doesn't have true amenities to hold values--good schools, parks, recreational facilities, shopping centers, churches - it will generally deteriorate. The only thing that makes property in a monotonous housing tract valuable after that is a superb location. Otherwise, values become static and in some cases will fall.

Manmade Attributes

As a consultant for a buyer, I once looked at a house that was located directly adjacent to a storm drain. I told my client that if he bought that house, the noise from the water in the winter time, combined with the animals that are attracted to that type of thing, could be a disaster. So my client didn't buy it, even though he had apparently already agreed to. The seller got furious when I told him and threatened to report me to the Department of Real Estate. Apparently, he didn't know about disclosure laws.



With a yacht harbor or marina, where there's leisure activity that attracts money, land values tend to soar. Take the Venice Canals in Los Angeles. When they were first built, they were fantastic unique, original, a re-creation of Venice, Italy, complete with gondolas and a Bridge of Sighs. If they would have been kept up, the area would have a completely different character than it does today. My parents used to own a few houses in Venice, one right along a canal. Unfortunately, the canals became a filthy, terrible slum zone. That's when the city of Los Angeles annexed the property and incorporated it. Now there's a movement afoot to rehabilitate the canals, but for decades they 
have been a manmade eyesore detracting from real estate values.

Sometimes a school or university will act as a line of demarcation. Around UCLA, there are at least five different neighborhoods: Westwood, Brenwood, Bel Air, West Los Angeles, and Beverly Hills, each having a completely different character. In New York City, Columbia University separates the Upper West Side of Manhattan from Harlem. Freeways and major highways also divide neighborhoods, usually resulting in values that are slightly higher on one side and slightly lower on the other. When the Hollywood Freeway was built over the Tejon Pass, there was a grade going up the hill. Obviously, trucks using this route would make a lot of noise, which was irritating to the people who lived in
the apartment houses next to the freeway. A few years later, completion of the Golden State Freeway diverted traffic and reduced a lot of the noise from the Hollywood Freeway. Any time you remove a detriment such as traffic congestion or noise pollution from a piece of real estate, both the property value and rental value are enhanced.

If a city added a stop signal to a corner, the house or apartment building next to that corner would be affected. The crossing might be safer, but the noise would increase because people would periodically be compelled to start their cars and motorcycles from a standstill. A friend of mine once told me that she had to move from a particular house facing a thoroughfare because the motorcycles would shift gears right at a point adjacent to her property.

When a city imposes traffic regulations, it directly affects residential real estate, many times in a negative fashion. But with commercial real estate, such as a restaurant or retail store, new traffic patterns can easily enhance values because motorists are obligated to stop, look around, and see what's in their immediate environment. What might be a disadvantage in one situation might be advantageous in another.

Other potentially negative developments may include a mini-mall or convenience store, which may add to the congestion problem and attract patrons who litter the neighborhood. But even these developments wouldn't deter me if I were able to buy a property at the right price.
There's always a price at which a property is worth purchasing. Many people like to live on a busy street because they think there's something going on. It's the attitudes and thinking of people that i determine value. You might find one person who thinks it's great and another who thinks it's terrible. 

If you buy a house or apartment building in the center of a neighborhood, the surrounding houses will act as insulation and keep undesirable property uses away. Commercial and industrial property and multiple identical properties won't encroach. If a property is located on the edge of a neighborhood, it could have an encroachment, especially if the property is located next to a highway, used-car lot, or other type of commercial establishment. If a property is commercial zoned, developers are prevented from building any more houses in that direction. But buying a property next to another property with a different use might be better over the long term. A high-rise office building is an example of a positive development, particularly if people want to live near their work.

Another example is a proposed hotel development in a desirable beach community adjacent to an existing residential development. One of the houses directly across the street from the proposed hotel now rents for $2,500 a month. It was originally purchased in 1963 for $16,000 with no money down. If it takes two years to build the new hotel, then after three or four years the value of the residence, which is currently $450,000, might go as high as $600,000, depending on the economy and the state of the housing market. You only need one opportunity like this in a lifetime to get you going.

If a property is commercially zoned, that serves as a barrier. You can't build any more houses in that direction. Or if a property is zoned for low density, you may be prevented from building multiple units on that site.

Recently, we built a new house on a lot I've owned for 30 years. In 1961, I could have built two units on the land. Today, because it's been down zoned, I was only able to build one single family residence, and a scaled-back one at that. The city is trying to do everything it can to reduce the population density because if there are too many people, it's too hard on the utilities, it strains the maintenance budget, and it's hard for the police and fire departments to provide an adequate level of service. Most cites in areas of fairly heavy density are having these problems and yet I think they are some of the best areas to invest in because the restrictions eliminate competition.

Before you buy anything, you should have as many facts at your disposal as possible. Bernard Barnch, a businessman who from a humble beginning rose to become one of the wealthiest men in America and personal adviser to several presidents in the first half of this century, used to say that if you have a very important problem and gather all the facts and information about the problem at hand, the weight of the facts will answer the question for yon or at least point to the direction of the solution. 

It's important, however, not to go crazy over facts. Dwell on the details and use the unimportant details for background. What's important and what isn't depends on the circumstances and the problem. The only way to know what's vital and what's extraneous is through education, knowledge, and experience. You just have to get out and do it; be proactive in your research and don't leave any important stone unturned. Yet remember too that the smart investor knows when to stop.