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Points to Keep in Mind for Real Estate Investments
When you are looking for property to buy as a real estate investment, you will need to do a thorough market analysis and investment analysis of potential properties to buy. Properties can be good investments or bad investments. The only way to tell the difference between the two is by comparing the properties to each other in terms of their price, taxes, and return on investment as well as doing a thorough analysis and comparison of the area(s) in which each property resides. Once you have chosen the area(s) and properties in which you are interested, do research to compare each pros and cons of the properties to each other. Compare their locations, square footage, price per square footage, taxes, neighborhoods, property condition, and any other property aspects that you feel meet your market analysis goal. When you are finished, rank the properties in numerical order. You are then ready to do your investment analysis. This will take more in-depth research because you will need to do an investment plan for each property. You may even have to talk to a realtor to find out what price the seller is taking on each property so that you can determine the loan amount and money down you will need for each property as well as estimate the monthly payments on the property. The investment plan will show a table of each property’s value for a given year, the loan balance for a given year, the total equity made for the property, the equity made for a given year, and the return on investment for each year you own the property. If you are not planning to keep the property as a rental or investment property, but plan to flip or wholesale the house, then your investment plan will need to include potential repair costs as well as the amount you hope to get out of the home once repairs are finished and you resell the home. This should also be taken into consideration when doing a market analysis of the home, comparing homes in the area with this particular home. Once the home is repaired, how much will it be worth? Once you have the investment plans completed for each property, you can begin to compare the numbers for each property to see which property has a higher return on investment and/or which property has a negative return on investment. Remember that some homes, which may be good for a primary residence purchase, may not be the best bet for a real estate investment. This all depends on the area of purchase for the home, the market value of the home before repairs are completed and the total profit you can make off of the home. To determine which home will have the best return on investment for a rental property, the Return on investment can be found by adding the annual increase in equity from monthly payments on the property and appreciation in value of the property for that year and then dividing that total by the previous year’s total equity over all years the property has been owned. In other words, the Return on Investment equals the Annual Increase in Equity divided by the Total Equity for all years the property has been owned up until the previous year. Of course this equation will not work if the real estate investor is planning on selling the house and then turning around and immediately selling the home after it is repaired. The equation for those interested in flipping houses is a bit more difficult to set up, since it is hard to say how much a home will sell for once it is repaired. Of course the best way to determine this is to do a market analysis of the better homes in an area, those homes that have been well-maintained. The difference in price between the home you purchase, in need of cosmetic and structural repairs, and the home you plan to sell that has great cosmetic appeal will show you how much profit you will make from the home. The make difference between purchasing homes to rent out or to sit on for a few years and homes to flip is the difference between instance gratification and long-term investment money. Sitting on a rental home for a few years and reselling when the market value goes up may mean making a substantial amount of money, but this may take 10-20 years to actually happen. Flipping a house usually requires a real estate investment of only a few months. Determining which type of real estate investment is right for you, usually means assessing finances to see if the investor can afford to hang on to properties for long-term or whether they need to purchase one property at a time and then move on.
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This intel was contributed by larryg
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May, 2012
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