Investing in Back Bay-Beacon Hill - Essay Example

Case Study – Investing in Back Bay-Beacon Hill The Revere Street Case1 presented Edward Alexander, a Harvard graduate working for a biotech firm in Cambridge, Massachusetts seeking to invest on real estate. As the case presented, Alexander did not like the idea of renting an apartment; instead, he would rather use the money to build an equity base for his real estate investment. He chose the Bay Back-Beacon Hill area to invest in because of the good reviews that he heard from friends who either own properties or rent apartments there. As an aspiring real estate developer, Alexander has $80,000 as equity. He has no actual experience in the field. His skill in developing properties is limited to 3 years of carpentry, designing and building sets for Harvard’s Hasty pudding Show. However, he has spent numerous hours learning about the field through the Internet, magazine subscriptions, talking to brokers, and inspecting properties in the area. The main aspects of the real estate industry in Beacon Hill are as follows. First, properties in the area are valued at a price that is either double or triple of its value ten years ago. This presents an opportunity for profits for investors and developers in the long run. Second, properties in the area are either rented as apartments ranging from $1,600 for one-bedroom apartments up to $2,100 for two-bedroom apartments. Third, speculators forecasted the “back slope” in the northern part of the Beacon Hill area to increase value in the future. Fourth, due to state legislature, which established the Beacon Hill area as an historic district, constructions of new buildings have been prohibited. As a result, the values of existing buildings were enhanced, while land values were limited. Fifth, that a large percentage of the brokers in the area also own properties making them Alexander’s competitors. And last, that there is a large investor interest in the area making properties that are available in the market sell quickly. Given the aforementioned characteristics of the real estate market in Beacon Hill, Alexander concluded that buying a property in the “back slope” would be most profitable because of the relatively lower values of properties there. Furthermore, he realized that it would be best to purchase a property, which would require an extensive amount of renovation to have better control on the property’s income potential. The property that interested Alexander was a 4-unit apartment in the “back slope.” The property is located in the middle of the block and is set 100 feet from the road. Built in the mid-1800s, it was damaged by a fire in 1996. An architect bought it for $250,000. He was selling the property for $350,000 to cover his expenses, including a $150,000 unfinished renovation job. Alexander’s main concern in buying the property is getting his finances in order. As mentioned, he only has $80,000 in cash. Thus, the rest of the money that he will need to cover all his expenses must come from outside financing. He considered three options. First, he could assume the current mortgage on the property. The problem with this option is that it would not give him the extra $50,000 he needs to finish the project. Second, he could get a new mortgage loan from a different bank. However, this would require Alexander to be personally liable for the loan, which he is not comfortable with. And third, he could obtain secondary financing. This, however, would mean more costs because it usually requires higher interest rates. As the case presented, Alexander’s main problem in securing the property was in his finances. Furthermore, his $80,000 equity is not enough to cover all expenses even if he gets the maximum amount for his loan, which is $450,000. As it was evident in the case, Alexander is an inexperienced real estate developer seeking to secure his first investment. While he is careful in making sure that he has all the information he needs to make this investment pay off, he is taking a big risk in deciding to be his own contractor. Although this will save him a lot of money, it is not very advisable for someone who lacks experience like him. Second, because the demand for the property is strong, it is unlikely that the seller will agree to a 5% sales deposit. This might go up to 10%, increasing Alexander’s risk to $35,000, which is no longer a small amount. In addition to the aforementioned risks, there is also a need to take into account Alexander’s projected income from the building. Based on his estimates, he valued the rent for a one-bedroom apartment at $1,600 and for a two-bedroom apartment at $2,000. These estimates are a little bit reckless given that there is no assurance that the value of his apartments will be in the higher end of the rent prices. A more conservative estimate of the apartment rents would have given Alexander a more realistic account of his income. Furthermore, it is not advisable for Alexander to use all his savings in an investment that he has little experience in. Although the property in the “back slope” is a good investment, it would be too risky for Alexander to proceed with this venture alone. Even if he gets his finances in order, the fact that he chose to be the general contractor for this investment despite his inexperience might cause him more expenses in the future. This might bring him unnecessary costs in terms of having to revise or repeat tasks and delaying the renovation’s completion time. Furthermore, the time that he has to allocate to the renovation might not be enough because of his full-time job. This might cause him to overlook some aspects of the renovation if he is not careful. Based on these factors, it will be more beneficial for Alexander to get a partner for his investment. Since this will only be his first investment, it would be better for him to get an experienced partner whom he could learn from and who could also help him shoulder some of the costs to his investment. Read More