The real estate market is finally heating up again in many parts of the nation, as the housing crisis appears to finally be drawing to a close especially in San Francisco, San Jose, Santa Clara, Redwood City and the Bay Area. This has led to a rise in the amount of real estate listed on the market as investment properties; there is an incredible amount of variety available to choose from currently. However, real estate investors may not understand how to accurately judge the value of one piece of property over another. One building may provide significantly more cash income on a yearly basis, but subject the owner to a significantly increased tax burden as well. Another may look great on paper, but revenue projections may not match housing and demographic trends, making it a huge risk to purchase. We’ve come up with three basic characteristics that every real estate investor should think about before they choose to invest in a property. While this is far from exhaustive, it is an excellent place from which to start:
Will the property provide good ROI?
The answer to this can be relatively complex. You need to make sure that you look at not only the basic revenue minus expenses equals profits part of the equation, but other areas of potential financial impact as well. Will the building affect your tax burden? How is the cash flow of the property; does it earn a good profit but hardly generate any cash, meaning it will be a huge net negative to your balance sheet for a while? There are plenty of questions to answer here, and you should consult with a qualified accountant to ensure that you are selecting the investment property that provides you the best ROI once as many variables as possible can be accounted for.
Is the risk level of the investment acceptable?
There is a wide variety of properties available to invest in. Some are more risky than others, and consequently offer greater profits. Think of a fixer-upper property; you may be able to acquire it at an excellent price, but you will then have to develop and renovate it before you can generate any income with it. Is that something you can do? If not, you may want to consider sticking to lower yield properties that don’t have as many ‘moving parts’ to a potential deal.
Do you have the time to manage it, or do you know a reputable property management firm?
If you don’t intend to manage the property yourself, you should definitely do some research with prospective property management firms in your area prior to making any acquisitions. Administering a large investment property on your own can be extremely time consuming, so most investors will definitely want to outsource this to a property management firm instead of doing it on their own.
By evaluating these three characteristics of potential investment properties, a prospective investor is significantly more likely to end up in an arrangement that will be a net positive to their balance sheet. People sometimes forget to evaluate the fundamentals when it comes to property investment, and can get carried away because they like a particular building or neighborhood; this is almost always a mistake. You should definitely view any potential investment through the lens of business. Is the purchase of the building the most efficient use of your funds? Is it likely that everything will go as planned and you can realize your profits? Do you have the infrastructure in place to support and administer your new investment? Dealing with common sense business concerns like this up front is a great way to minimize the risk of making bad decisions when it comes to real estate investment.