What Real Estate Investors Should Know Before the Investment
Real estate investors are those men and women engaged in real estate investing as a business for the purpose of making money. And typically when they adhere to the principal of "buying low and selling high" they can generally show a profit on almost any real estate investment they make.
Fair enough, but unless the numbers are screaming "low" or "high" loud enough to be heard several counties away the investor will have to do some digging to make that determination. So it seemed like a good idea to list a few things a real estate investor should address about a property before making any final real estate investment decision.
1. The Correct Property Type
For those of you with little or no real estate investing experience investment real estate essentially falls into one of two categories.
- Residential (i.e., "dwelling" rental, such as an apartment complex)
- Commercial (i.e., "space" rental, such as an office complex)
Understanding these categories is essential when comparing "similar-type" properties. For instance, you would not compare an apartment complex to an office complex.
2. How Does It Compare to the Market?
This is a preliminary assessment just to give you an overview. Based upon recent sales of other similar-type income properties in your local market, how does the subject property measure up?
- As good, inferior, or heads and shoulders above the rest?
- Does your assessment apply to the property's current condition or with minimal alterations?
3. How Does It Stack Up to the Competition?
This takes the assessment a step deeper and concerns the subject property's location, age, type of construction, condition, unit size, amenities and features. In this case, make your evaluation on the basis of two categories.
- "Unchangeable" (like property location)
- "Changeable" (like property condition)
4. What are the Physical and Economic Characteristics?
This concerns the type of rental agreements already in force that might impede or inhibit a real estate investor from making substantial improvements to the property. Here's the idea.
- Although long term leases provide some amount of financial security, they essentially hamper any opportunity to make improvements that might warrant higher rents and perhaps add value to the investment property.
- At the same time month-to-month agreements are less financially secure, they do offer opportunities to improve the space when vacant and in turn a chance for the investor to seek out tenants willing to pay higher rents perhaps on longer term leases.
5. How Real Are the Numbers?
Real estate investing involves a lot of number crunching to determine the cash flow, rates of return and profitability for any income-producing property.
- Rental income
- Vacancy and credit allowance
- Operating expenses
- Debt service
The key here is to be sure that your investment analysis relies on realistic numbers for all your projections. This applies whether you're thinking about selling or buying a property because unrealistic financial data will skew the property's value and can result in a poor investment decision.