Real estate (property) has no purpose unless there is a way to extract value. As investors, we focus on the cash value. Cash now, through rents after operating expenses, or future value through asset appreciation.

Home owners focus more on the utility value - having a home, a place to live. The home buyer might choose a primary residence based on the school catchment, because one partner falls in love with the property or because the commute is reasonable. Value comes from what the home provides the owner when they are living in the property. For the balance of this article, I will largely avoid the utility value. We are investors. This is Property Investor News. We trade the utility value to tenants so they have a home while we receive the income plus possible capital appreciation.

First Principles tells us an investor needs to start with 'highest and best use'. What is the best way a specific piece of real estate, a site or plot of land, can be put to use?

Next, the investor must figure out what it will cost to get to the highest and best use. What changes need to be made so the property is used in the most productive way? There may be a few possible end states. The costs to achieve each outcome will vary. The savvy investor will run the numbers for each alternative. The best choice will emerge from the analysis. You will also identify the risks per strategy.