Real estate investing provides no guarantees. Whereas in some cases real estate investing has made some investors very wealthy, it has also (not unlike any business venture) left many others disillusioned; primarily because it didn’t make them wealthy, and in some unfortunate cases, even lost them money.
In this article, I want to discuss some issues connected with the selection and acquisition of investment properties which, if neglected, can get real estate investors into trouble by serving the investor less-than-desirable cash flows and rates of return.
1) Do Not Neglect to Run the Numbers
Because a rental property’s financial performance determines investing success or failure, it just makes sense that you must be able to run the numbers adequately so you can measure a property’s vital signs and judge its health as an investment opportunity before you spend the money.
Whether you’re an experienced income property investor or beginner, you must develop proficiency for measuring such basics as rates of return, cash flows, and estimates of value. Otherwise you’re just guessing as to whether a specific property is profitable, meet your investment objectives, and at the end of the day will make you money.
Understand that the prudent investor always seeks a return on investment. It’s not an emotional matter (physical aspects of the rental property are secondary). Real estate investing concerns buying the property’s anticipated economic benefits called the income stream. Therefore you must be able to examine revenue streams along with expenses, net operating income, and cash flows carefully with some serious number crunching before you make a purchase.
2) Do Not Neglect the Price
It seems unnecessary to warn investors not to over pay for income property because it’s difficult to conceive that any reasonable person would pay more for real estate than fair market value—but they do, perhaps not knowingly, but by default.
Investors that buy income property based on emotion, for instance, or because they are told that it’s a good buy (without credible data to substantiate the claim), always run the risk of paying too much for rental property.
Before you invest, you must always research the fair market value in a given market area for the type of investment property you’re interested in beforehand and then base your offer accordingly. At the very least, do a comparable sold survey. You need to know the price per unit and capitalization rate comparable rental properties recently sold so you don’t get caught up in sentiment and sales hype.
3) Do Not Neglect a Tendency to Accept Unrealistic Expectations
A tendency to accept, or unwittingly fabricate, high and unrealistic expectations surrounding the potential benefits of a rental property commonly occurs in real estate investing when investors become more anxious to make an investment than they are to make a good investment.
When considering an income property with low rents, for example, don’t jump to the conclusion that you can raise the rents and still maintain an occupancy level able to produce the income stream you are counting on (at least not overnight). Furthermore, look for underlying reasons why the rents are low and only afterward, base your rent estimates on comparable income properties in the surrounding area.
Also, don’t count on a bump in property value based on what the local planning department tells you without thoroughly researching it. Rezoning a property, for instance, generally requires a favorable vote from agencies other than the planning department such as traffic control and the fire department.
Here’s the bottom line.
If you want to succeed at real estate investing, always do your homework. Bear in mind that that one-in-a-million investment opportunities to purchase a rental property guaranteed to make money is going to happen to the next real estate investor, not to you. So remain diligent.
