Investment property is not like the real estate investment you may make whenever you acquire a residence. A your home is where you dwell, raise family members, and interact socially with the neighbors; so you would definitely desire an appropriate floor plan, outstanding school district, and amiable local neighborhood. Investment property however is fundamentally is not any of those things because real estate investing essentially boils down to numbers.
Consequently, as a real estate investor with an eye toward revenue, be less involved about whether or not the building is where you would pick to live (because you possibly will never live there), and rather take into account the funds you might make for your loved ones or as a supplement for your retirement by owning the property.
Here’s the point.
A profitable real estate investment does equate to your standard of living. What matters most for you as an investor is what tenants think about occupying your property. That is, are folks prepared to pay the rents you will charge for them to reside there? If so, and you did your cash flow evaluation properly, you may possess a money-maker; if not, you could have lost your daughter’s college tuition.
Enough said. Here’s what you can do to help assure that you make a worthwhile real estate investment and purchase a profitable investment property.
1) Do a comparative marketplace analysis. You need to know what similar rental properties have already been selling for within your nearby marketplace. You don’t want to acquire an apartment complex or office building for much more than what has recently offered (inside the last six months, or so) given comparable location and condition unless you have a justifiable reason to do so.
2) Compare cap rates. In this case you’re not examining price per unit or square foot, but desire to know how the net operating income measures up to the asking price. Divide your topic property’s net operating income by its sale cost to compute its cap price after which compare it to cap rates of comparable sold properties. If unsure, consult a nearby real estate professional or appraiser, or perhaps even ask a real estate expert to step in and help you. In any situation, cap charges might be a great indicator of profitability, so unless of course you anticipate upside within the property’s rental income you might not desire to invest in a property that has an unfavorable cap rate in comparison to the local market.
3) Cash flow before taxes. Cash flow is really what you pay for when you buy investment real estate. But cash flows before taxes don’t reveal what you will collect after you pay your income taxes. So you should determine what you might collect after income taxes before making a real estate investing decision
4) Cash flow after taxes. This represents what remains as a result of owning the rental income property after the Feds are paid. In this case you should look for a positive amount unless your objective is to have a tax write off or maybe anticipate a huge return due to appreciation when the property is subsequently resold.
5) Rate of return. You can find numerous returns you are able to compute to help you determine whether the property is lucrative enough for you to make the investment. Cash-on-cash, internal rate of return, and financial management rate of return are just some typically utilized by investors. There is certainly real estate investment analysis software that will make these calculations for you, or you can turn to a professional for assistance if you are in the dark here. The point is not to ignore the rate of return you expect by owning the property because it does gauge whether or not your investing objectives are met and in turn enables you to compare it to other investment opportunities under consideration.