5 Tips for Investors Thinking Real Estate Investment
Ask many seasoned real estate investors how to make money real estate investing and they'll tell you to "buy low and sell high". Fair enough. But that doesn't really say much to novice investors who already know that principal but are trying to become more savvy about real estate investing in general.
After all, unless the numbers are screaming "low" or "high" loud enough to be heard several counties away, the novice investor knows it will take some digging into a rental property's financial performance to correctly make that determination.
So it seemed like a good idea to list a few things novice real estate investors should be aware of before making any final real estate investment decision. It should be noted that we are limiting our suggestions to income-producing properties only (not bare land).
1. The Correct Property Type
All rental income property primarily 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 only. Based upon recent sales of other similar-type income properties in your local market, how does the subject property measure up? Here are a couple of samples to give you the idea:
- "Do you regard the subject property 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" (e.g., property location)
- "Changeable" (e.g., property condition)
Obviously you want to place more emphasis on the unchangeable (like location) so pay close attention to things like the property's proximity to shopping, schools, major highways, and so on.
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.