A mistake often made by beginning real estate investors is not to consider what the income property may be worth in the future. Resale is often relegated to speculation and serious focus on selling a property they haven’t yet purchased is simply ignored by many investors.
But remember, the same things you care about in the rental property like cash flow, financing, operating expenses and tax benefits are what a buyer will care about in the future. And as it goes, if it’s not worth selling, it’s not worth buying. In other words, regardless of what your intentions might be for purchasing the property today (perhaps to have it passed down in your family for the next two or three generations), it’s always prudent to also consider resale, because who knows?, perhaps in five years a better real estate investment opportunity may come along and you will want to cash out. So adopt the discipline not to buy a property on Monday that you can’t sell on Friday and you’ll began to share the same mindset that separates the successful investor from the rest of the pack.
How do you do that? Run tomorrow’s numbers today and see what it will look like to a future buyer. Use a pro forma income statement to project the property’s future net operating income (NOI) over the next one to ten years. (Projected future income less projected future operating expenses equals projected future net operating income). Then estimate what you expect a reasonable capitalization rate will be in the sale year and calculate a projected future sale price. (Projected net operating income divided by projected capitalization rate equals projected future sale price). Now, step back and look at the numbers and ask yourself whether a future real estate investor would consider the property worth buying at the price worth it for you to sell. If not, if it’s not worth selling, then it might not be worth buying.
