Wanted to share a situation we had over the weekend. Our JV colleagues found a great deal on the surface of it. A property failed at auction and we thought to convert it into flats and rent the down stairs as an office for a charity with upstairs flats. We were very keen to do the deal and I viewed the property. I really liked the deal and the town…On the scope of it….first thought GREAT DEAL. 17% net …no voids… no management….no maintenance….8 year contract….break clause only coming into effect year 5.
All good…however the property is in a flood zone so in the worst case the office could not be converted into flats. Our question came up…what happens after year 5? What happens if they use the break clause. What is our Plan B? Actually we did not have a Plan B. We would not be as profitable.
What became very apparent to us was not to chase yield but focus on the downside. When protecting the downside the upside takes care of itself.
I strongly suggest when you do a project, think in terms of the worst case. Will you be profitable?
Chasing Yield Versus Protecting Risk in Property…which is better?
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