The right pick: Look for a developer with a good track record. The company should have at least a decade’s experience and should have delivered at least 2,000 houses. Evaluate the design, construction and customer service before making a purchase.
Location: Some developers create destinations, but such projects should be evaluated at a discount to current prices. The growth drivers of a location lie in its ability to fuel job creation and corresponding development. Projects that do not fulfil these conditions are risky investments and are not worth considering even at discounted rates.
Investment structure: There should be clarity about the title and entitlement risks, including zoning and restrictions on end-use. Basic risks such as completion and diversion of funds by the developer can be mitigated by escrowing receivables.
Prudent leverage: Loans can act as good return multiplier in real estate. However, if leverage is not supported by adequate cash flow, it can end up destroying a buyer’s net worth. As far as possible, long-term assets should always be bought without loans.
Adjusting risks: There is a rule of thumb when investing in real estate: Costs are real while revenues are assumptions. Delay in project approvals and execution can lower return. You should deduce if the time taken to get the return as well as the return, in itself, are worth the risk.