Guidelines before taking a Real Estate Investment decision

Real estate is defined by Investor Words as “A piece of land, including the air above it and the ground below it, and any buildings or structures on it, also called realty”. That of course is the permanent value on which all the rest of the market value is based.

• Be aware of your cash flow limitations.
Before entering in the real estate investment, understand the cash flow. On deciding particular section, take into consideration the cost factor involved in order purchase the land or building. For example, if the cost of the house is in the $600,000 range and the property taxes are high your expenses will force you to charge rents in the $3000 to $4000 range. That limits your pool of potential renters pretty severely.

• Understand the property’s net operating income as a percentage of the price is.
This is called capitalization and is an expression of how much every dollar you make in a year will cost. The property purchased should be able to give a good cap rate. Divide the net income for the past year by the purchase price. The property should give you a minimum 10% or better cap rate.

• Beware of high pressure sales tactics.
If some one is pushing hard for a decision then something about the deal is not right. In such cases, it would always be better to take time in making decision on the purchase of the particular asset. Take into consideration, the history of the asset in consideration, the purchase price, the future market of value of the asset, etc..

• Know the history of the current tenants and the reputation of the neighborhood.
As the saying goes, “ One rotten apple could spoil the whole lot”. Similarly, a beautiful old house with charm and style may sell for a great price but be located in a decaying area of the city. In a neighborhood where the prospective tenant will be facing security risks such as drug and gang activity or where they are afraid to send their children to school they will not stay.

Having a property in such a location would never attract good tenants, which infact would turn out as a poor investment as well as an insurance risk.

• Develop your real estate business skills
Dealing real estate investment requires different business skills than just investing in stocks and bonds. Most real estate investors like to stay pretty much “hands on” with their acquisitions, especially if the properties are the remodel and refurbish types of investments. In order for the formula to work, one must be able to negotiate air tight and favorable contracts with a variety of contractors.

Understand local laws and ordinances and know where to obtain permits and schedule inspections.

Learn to forecast the market by watching the housing starts, the new and existing sale numbers and calculate the average days on the market of properties in your range.

Justin Billingsley

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