Investment hypothesis

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Investors usually have a basic premise for making a particular investment. O'Connor and Associates terms this concept the "investment hypothesis". Evaluating the accuracy of the investment hypothesis early in the acquisition process allows the investor to increase their returns and reduce due diligence expenses.

Following are examples of typical investment hypotheses:

This property will yield an unleveraged 7% return based on its current revenues and expenses.

There is an existing tenant with a below-market rent for half the space in this office building. By either increasing their rent to market or replacing them with a tenant at a market rate rent when their lease expires in three years, this building will generate an 11% yield on total costs.

An existing apartment complex is 60% occupied and has substantial deferred maintenance. The investor believes by spending $6,000 per unit to cure deferred maintenance he can increase rents to $.70 per square foot and generate a 10% yield on total costs.

In many cases, the investment hypothesis is correct. However, in cases where the investment hypothesis is not correct, the investor can expend substantial time and due diligence costs before concluding the investment will not succeed.

Alternatively, the investor could proceed with the investment and not realize until after capital expenditures have been completed that the investment hypothesis is not correct. In either case, the investor benefits from realizing as quickly as possible that the investment hypothesis is not correct.

Following are the benefits of obtaining an expedited analysis of the accuracy of an investment hypothesis:

Achieve better investment results by considering more investment options and finalizing only transactions which best fit your criteria.

Decline to proceed more quickly for transactions which do not fit your criteria. Both sellers and brokers appreciate a fast decline if the transaction is not going to close. Investment hypothesis costs are reduced, including legal fees for the contract, third-party reports, other due diligence costs and legal fees for loan documents.

Principle is not required to spend time or travel to the property to complete the initial review.

Cost of initial review is modest compared to cost of complete due diligence.

Patrick C. O'Connor has been president of O'Connor & Associates since 1983 and is a recipient of the prestigious MAI designation from the Appraisal Institute. He is also a registered senior property tax consultant in the state of Texas and has written numerous articles in state and national publications on reducing property taxes. He continues to set the standard in direction and quality of our appraisal products, adding services ranging from business valuations and business appraisals to cost segregation analysis for income tax reduction. For more information please www.poconnor.com today!

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