Key factors people making investment in non-residential and residential properties.

Compared with other types of investments, real estate investing involves a relatively
favorable risk/reward profile, with relatively low liquidity (ease of entry and exit). Let's see
some of the most important factors to consider when investing in real estate.

1. Location of the Property

Why is it important? The age old punch line "Location, Location, Location" still rules and
remains the most important factor for profitability in real estate investment. Proximity
to amenities, peaceful conforming areas, neighborhood status, scenic views, etc. are major
factors for residential property valuations. While proximity to markets, warehouses, transport
hubs, freeways, tax-exempt areas, etc. play an important role for commercial
property valuations.

What to look for? A mid-to-long-term view, about how the locality is expected to evolve
over the investment period. Today’s peaceful open land at the back of a residential building
may be developed into a noisy manufacturing facility in future, making the residential
valuations less profitable. It is advisable to conduct thorough check about ownership, type
and intended usage of neighboring areas, establishments and free land in the locality.

2. Valuation of the Property

Why is it important? Real estate financing during purchase, listing price during the
sale, investment analysis, insurance premium, and taxation — all depend on real estate
valuation.

What to look for? Commonly used valuation methodologies include:

 Sales comparison approach: Recent comparable sales of properties with similar

characteristics –most common and suitable for both new and old properties
 Cost Approach: All cost summation minus depreciation – suitable for new
construction
 Income approach: Based on expected cash inflows — suitable for rentals

3. Investment Purpose and Investment Horizon

Why is it important? Given the low liquidity and high-value investment in real estate,
lacking clarity on purpose may lead to unexpected results including financial distress,
especially if the investment is mortgaged.

What to look for? Identify which of the following broad categories suits your purpose and
prepare yourself accordingly:

 Buy & Self-use: Savings on rentals, benefit of self-utilization and value appreciation
  Buy & Lease: Regular income and long-term value appreciation. Requires building a
temperament of being a landlord — for handling possible disputes & legal issues,
managing tenants, repair work, etc.
 Buy & Sell (Short-term): Quick, small to mediocre profit - usually buying under
construction properties and selling slightly high once ready
 Buy & Sell (Long-term): Large intrinsic value appreciation over a long period; a
solution for long-term aims like retirement planning, child’s education, etc.

4. Expected Cash Flows & Profit Opportunities

Why is it important? The investment purpose and usage influence cash flows and hence
profit opportunities.

What to look for? Develop draft projections for the following modes of profit & expenses:

 Expected cash flow from rental income — Inflation favors landlords for rental income
 Expected increase in intrinsic value due to long-term price appreciation
 Benefits of depreciation (and available tax benefits)
 Cost-benefit analysis of renovation before sale to get better price
 Cost-benefit analysis of mortgaged loans vs. value appreciation

5. Be Careful with Leverage - Know the Pitfalls

Why is it important? Loans are convenient but may come at a big cost — you commit your
future income, to get utility today for a cost of interest spread across many years.
Understanding how to handle loans of this nature allows you to benefit from it to the
maximum. While ignoring the risks can lead to major pitfalls.

What to look for? Depending upon your current and expected future earnings and paying
capability, consider the following:

 Decide on the type of mortgage loan that best fits your situation (Fixed Rate,
Adjustable Floating Rate, Interest Only or Zero Down Payment)
 Be aware of the terms and conditions and other charges levied by financiers
 Hunt around and bargain for a better deal using a tool like a mortgage calculator to
find lower interest rates. Also look for lower insurance premiums.

6. Investment in New Construction vs. Existing

Establishments
Why is it important? New construction properties usually offer attractive pricing, the
option of customization, clearly documented amenities and clear titles. The investor has to
deal with only the construction company as a counterpart. Risks include delay in possession,
an increase in costs, no awareness about the neighborhood, etc.

Those on resale have vice-versa factors and may need a more thorough check on ownership,
documents, and legal matters.
What to look for?

 Check past projects and the reputation of the construction company for new
construction investments
 Review property deeds, recent survey, and appraisal report for old constructions
 Be aware of monthly maintenance costs, outstanding dues & taxes from past owners.
These costs can severely impact your regular cash flows
 Investing in on-lease property (possessed by others) – Is it rent controlled, rent
stabilized or free market? Is the lease about to expire? Does it have renewal options in
favor of the tenant? Are interior items owned by the tenant or owner? etc. are some of
the details to be aware of.
 Quality-check items (furniture, fixtures, and equipment), if included in sale

7. Indirect Investments in Real Estate

Managing physical properties over a long term horizon is not for everyone. There are also a
few alternatives to indirectly invest in the real estate sector and aim to reap the benefit.

What are the Options?

 Real estate company stocks – Equity stocks of real estate companies can be bought
and sold on exchanges
 Real estate sector-focused mutual funds/ETFs – Sector specific funds like “Fidelity
Real Estate Investment Portfolio (FRESX)” offer the benefit of diversification and
professional money management, at the cost of fund expense charges
 Mortgage bonds – Secured by physical property, they offer lower rates of
return compared to corporate bonds
 Real Estate Investment Trust (REIT) – offer high yields, tax consideration and high
liquidity as they trade on stock exchanges.

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Government influence in monopolies:

The societal and economic dangers of monopolies are clear. To combat the effects
of these large corporations, the government has tried, through both legislation and
court cases, to regulate monopolistic businesses. Though the strategies that the US
has followed have varied, the aim of curbing market hegemony has been relatively
constant. Though examples of attempts at government regulation are widespread,
three stand out from the rest: railroads of the 19th Century, Microsoft, and IBM.

Most regulation in its early history revolved around the railroad industry. At first,
the responsibility of control of public industries fell on the individual states.
However, the ineffectual legislation that was passed and the inability to control
railroad monopolies made the need for federal regulation painfully apparent. The
passage of the Interstate Commerce Act in 1887 created the first interstate
regulatory committee. Though this group was not extremely effective in curbing
the practices of the railroad, the precedent for federal regulation had been set. Later
legislation, such as the Sherman and Clayton Anti-Trust Acts had more of an effect
on large businesses. The latter bill created the Federal Trade Commission, which is
the major regulatory body of monopolies today.

The important question that arises from regulation is: Why does the government
feel that it must control big businesses? Does this not violate the principles of
freedom outlined in the Constitution? Indeed, the government never tried to stifle a
corporation simply because it was strong. Instead, regulation exists to preserve
competition and the freedom for smaller companies to enter the market. If one
company controls the market share, smaller groups will never be able to flourish.
For example, the dominance of Microsoft in recent years has raised the question of
whether its practices are monopolistic. Because the corporation controls the
majority of the market in nearly all of its markets, there is an overwhelming social
pressure for regulation.

The earliest regulatory measures were not as focused on competition, however.

The goal was to protect the consumer. For example, the Grangers (19th Century
farmers) felt that they were being oppressed by unfair practices of the railroads.
There was great social unrest in this population because of the practices of large
corporations. To avoid revolt and turmoil, the state government passed the Granger
Laws. This group of legislation was essentially an attempt to appease the troubled
farmers. It was not until the end of the 19th Century and the beginning of the 20th
that regulation made the turn toward preserving competition.

Another trend in regulation is the unfortunate tendency of legislation to have little

effect. Most of the laws created to control railroads were simply ignored by the
large corporations. Similarly, the action of the Federal Trade Commission against
Microsoft is often viewed as a trifle. Judge Stanley Sporkin rejected the June 1995
decision regarding the Microsoft monopoly, saying that the ruling was a mockery
and that stricter control must be taken. Most attempts at federal regulation have
been mediated, modulated, or amended until they lose much of their original bite.

Clearly social and governmental history has shown an ever-present desire to curb
the growth of corporations. The dangers of allowing one company to assume
supremacy over a market have frightened the government into regulation. Though,
in many instances, the legislation fails to achieve its original goal, governmental
regulation has become a standard in interstate and international commerce.
America was founded on the principle of free trade and freedom of competition.
Therefore, the government has assumed the responsibility of preventing the
formation of monopolies and curbing unfair practices of large corporations.

https://cs.stanford.edu/people/eroberts/cs181/projects/corporate-monopolies/government.html

http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.580.5272&rep=rep1&type=pdf

There are several reasons why law firms may be willing to pay a premium to locate in a city’s CBD.
We office three hypotheses: 1) CBD location for law firms results in a clustering of firms and
therefore lowers search costs for the firms’ clients, 2) proximity to other law firms may create
network effects, and 3) CBD location may serve as a quality sorting and branding mechanism as firms
market their reputation. We expand on each of these hypotheses below, but an important caveat is
in order. Our empirical analyses do not attempt to directly test for the underlying reasons for CBD
location, nor do we aim to identify which one of our hypotheses dominates the others. In fact, as we
explain in more detail below, all of our rationales for CBD location likely complement each other. We
do, however, estimate our CBD premiums over time as transportation and communication costs
have varied – providing more detailed insights into our search cost argument. Moreover, we also
include a measure for firm quality in our analysis to proxy for identifying firms that are likely to
engage in branding expenditure.

Search Cost Argument: The most obvious rationale for CBD location is that this location choice puts
the firm at close proximity to the firms’ clients and that locating further away (perhaps in less
expensive areas of the city) may lead to the loss of these clients to competitors. By locating in the
CBD, the law firm increases the demand for its services by reducing the cost of transportation for its
clients. In the earliest and most simple spatial models, Hotelling (1929) showed how vendors would
logically and economically locate next to each other. In the same way that automobile dealers tend
to locate near each other as a device for lowering shopping costs, law firms may locate near each
other. Since shopping for lawyers is not so physically dependent, however, this effect is now likely to
be small, even if it were previously large owing to higher costs of transportation, telephone, and
related communication technologies.

Networking: While proximate location to other law firms may create lower search and shopping
costs for clients, it might also stand to create network effects. Proximity to other law offices may be
valuable as firms may work together or convene for professional reasons.13 The most obvious node
in such a network is the courthouse where lawyers do portions of their work. The courtroom, judge’s
chambers, clerk of court, and related mandated recording places provide a travel cost based reason
for firms to locate near each other and proximate to the court house. Obviously, as email, fax, and
other technologies emerge, this incentive is muted. Also, as some of these functions, such as deed
recording, are parsed to satellite stations away from the court house, we may expect more diffuse
location of law firms. In two papers similar to ours in spirit and substance, Arzaghi (2005) and
Henderson and Arzaghi (2007) use Census Bureau micro-level data on advertising agencies. In
Arzaghi (2005), the author studies a sample of agencies that re-locate to urban areas between 1992
and 1997. Using annual payroll as a proxy for firm quality, Arzaghi demonstrates that higher quality
advertising agencies tend to locate in high rent areas to sort themselves and shift away from lower
quality agencies. In Henderson and Arzaghi (2007), the authors use a sample of agencies that move
within Manhattan Island and show that higher quality agencies are willing to pay premiums to locate
in high clustered areas with other agencies. As in our analysis, Henderson and Arzaghi hypothesize
that these higher quality agencies are the ones who benefit more from networking. In this paper, we
attempt to apply this general idea to law firms and we will also estimate the direct premiums that
firms pay to locate in areas where networking is likely.

Branding: Our final rationale for why law firms may locate in CBDs and pay a premium for this
location is because these districts may act as a signaling device to the market through quality
reputation effects.14 Casual empiricism and the popular media recognize the fact that law firms and
other similar service industries build brand capital by engaging in sunk cost investment expenditure.
In addition to advertising and other branding mechanisms, some law firms invest in expensive, high
quality office space and over the last decade several of these firms (as well as several major
accounting firms) have even purchased the naming rights to buildings.15 As noted in Klein and
Leffler (1981), this investment expenditure serves as collateral that bonds the firm to its contract
with clients. As we will explain in the next section, we will attempt to isolate the branding hypothesis
by including a quality variable to proxy for how likely law firms are to engage in reputation
expenditure. Land which is located most near the market, the point of sale/consumption, will have
the highest land rents.16 Accordingly, firms which locate nearest the market center will pay the
highest prices for land use. Additionally, we expect that such firms will be the most productive and
highest paid firms, as they exhaust the intensive margin of rent. Put simply, the best, most
productive firms/lawyers, will use the most expensive land in areas that save the greatest amount of
travel time and provide for the best networking opportunities. Moreover, the office space markets in
CBDs will have high quality space with amenities that enable firms to quality sort and market their
reputation through branding investment expenditure. It is also important to note that it is very likely
that for many law firms, our rationales for CBD location complement each other. For example, a firm
may attempt to quality sort and brand itself by locating in very expensive front-beach property in
Malibu, California. This location, however, is unlikely to provide for networking opportunities and it
would not lower search costs

for clients. Our three hypotheses for CBD location are not mutually exclusive. With the exception of
branding expenditure on high-end amenities within the office-space itself (which we show above is
likely more prevalent inside CBDs and we also attempt to control for this by including measures of
firm quality in some of our models), quality sorting and branding by location, and networking are all
likely complementary