Conserve Wealth (Return “of” investment)
Create Wealth (Return “on” investment)
Although our goal at K2 is to identify and purchase bargain properties utilizing inconsistencies that are inherent in the real estate market, our objectives is to embrace a more conservative approach.
For example, purchasing a property at 50% of appraised value sounds like a great opportunity. But, it can create a huge problem if we have not preplanned sufficient reserves to maintain the property until we dispose of it.
If our cash flow and reserves are sufficient and our management is consistent, history shows us we should be meeting our #1 objective of conserving our clients wealth.
Returns on investment are calculated in four basic areas when creating wealth in a typical real estate transaction:
- Cash flow: Dividends earned on the investment.
- Tax savings: A competent tax counselor can outline the significant tax advantages from the direct and indirect expenses generated by real estate investments. (we do not offer tax advice)
- Mortgage principal reduction: Loan principal paid through cash receipts of the investment.
- Appreciation: There are two major types of appreciation in real estate valuation.
a. The first is the natural progression of the market place; increased demand for the underlying land, increased cost to rebuild the structure(s) and infrastructure(s), general inflation, demand for a particular type of property etc, this occurs as an event of the marketplace and generally is out of the investors’ control.
b. The second is preplanned appreciation. Preplanned appreciation requires knowing the marketplace and possessing the necessary resources to obtain and improve the asset. At K2 we work to uncover properties that are underachieving. If we can economically overcome the reason it is underachieving we can create added value or appreciation of the asset and bring increased income beyond natural inflation to our investors.
Investment in under-achieving real estate coupled with wise planning and prudent reserves are key to meeting the objective of K2 for our investors; conservation of wealth and consistent cash flow.