The “get-rich-quick” methods of real estate investing are something I generally oppose because they often assume self-management and typically ignore your opportunity cost of time and the risks of high leverage. Besides, what reasonable thinking person would believe that someone who in fact has the “map” to a buried treasure would be so apt to share it?
In truth, there is no sure-fire way to achieve real estate investing success apart from hard work, plenty of good research, and a concise, systematic and thorough real estate analysis. Fair enough.
Okay, so in this article I want to provide you with a real estate investing overview to acquaint you with some things worth considering about real estate investment that will get you started on the right foot.
1) Opportunities to Make Money
Real estate investing can become a profitable business because there are various ways for you to add value to real estate investment property.
- Real estate acquisition – buying at a price that leaves you with “upside” potential to add profit.
- Upgrades – adding value by improvements or renovation.
- Financing – borrowing money at a highly favorable rate and terms.
- Site analysis – buying in a location where growth trends or changes in zoning will have a positive impact on the property.
- Controlling operating costs – reducing potential cash outflows and thereby increasing potential cash inflows.
- Innovative property management – increasing the amount of rent and reducing the vacancy factor.
2) Business Goals
Consider your personal business investment goals. What is it that you want to achieve by real estate investing?
- Maximize long term wealth.
- Short term financial goals like cash flow.
- Develop or own only the highest quality properties in prestige locations.
- Own the largest market share of a certain type of income property in a local market.
3) Short-term Goals
Consider what you hope to achieve financially in the short term by investing in the rental property. For instance,
- Satisfy the requirements of the lender in terms of pre-leasing or debt coverage cash flows.
- Satisfy the minimum required first year cash on cash returns required of investors.
- Project minimum internal rates of return for the entire holding period of some minimum percentage.
- Maintain occupancy levels above 95% in all portfolio properties.
4) Investment Value Approach
Consider which approach will ultimately determine property investment value. Different from market value – which is derived from investment decisions of other investors in the market – this signifies what would attract your capital to the property. For instance,
- The exploitation of market niches such as tax foreclosures, fixer-uppers and so on.
- Stabilized income and expenses at a given point in time without adjusting for changes that might occur in the future.
- Market-orientated information such as sales comparison, replacement cost, or the present value of anticipated future net income streams.
- Some assumptions about income and expenses over time, tax shelter, appreciation or depreciation rates, reversion (property value at the end of the holding period) and so on.
5) Performance Gauge
Consider which returns and measures you will use to gauge the property’s financial performance and tend to base your real estate investment decision. For instance,
- Capitalization Rate – a popular return on asset indicator of how much debt an income property can carry.
- Cash on Cash Return – measures the initial profitability of a rental property.
- Internal Rate of Return – delivers in one number an investment return that integrates rental growth rates and property value appreciation and used as a comparison to the real estate investor’s required rate of return for making capital allocation and initial investment decisions.
6) Number Crunching
Consider how you will crunch the financial data in order to determine the rental property’s cash flows, rates of return and profitability.
- Manually with an Excel spreadsheet.
- Investment in a real estate investing software solution.
- Rely on real estate analysis reports presented by others.