How Not To Pay Too Much for Your Real Estate Investment Property

Whether you are buying your first property, or your fifth, the process of buying a real estate property is a detailed, time-consuming venture. At the same time, it’s an emotional period laden with difficult choices. You want to ensure that the property you purchase meets your investment oals and objectives now, and in the future. Each of these decisions often involves money. When you consider all that money represents, you’ll want to ensure that you don’t pay too much. This article helps you become a savvy buyer, by pointing out some of the pitfalls inherent in the investment property - buying process. These include such things as knowing what you want before you begin process, taking your time to analyze, choosing the right commercial real estate professional, and remaining objective while viewing potential investment properties. With this information, you’ll be closer to finding your right investment.   1. Before you start  looking for the investment properties, develop a criteria and strategy  Everyone has an idea of investment in real estate. Investment means return on your investment. What kind of return are you looking for? Are they realistic? The returm on your investment means Capitalization Rate (in short Cap Rate). Basically, a cap rate is defined as a return on your investment in a no financing scenario as if you are buying the property with no financing on it. the Cap Rate is defined as net Operating Income divided by price of the property you are willing to pay. Therefore, the Net Operating Income (NOI) generated by the property plays a very important role in determining the offer price. To calculate the true Net Operating Income you may like to normalize the Income Statement of the property by taking all the expenses such as property management, maintenance, legal and accounting.  Sometimes some of these expenses are hidden which gives an over-stated Net Operating Income (NOI) and Cap Rate. At this point a Buyer is willing to pay more price for the property than it should. But should the buyer pay a higher price than the market value? That’s why it’s a good idea to develop a good relations with an experienced and dedicated commercial real estate professional who can analyze the property and pin point various things in the analysis.    2. Rules of Thumb vs Internal Rate of Return There are many rules of thumb which buyers use.  These rules of thumb are -  Gross Income Multiplier, Net Operating Income Multiplier, Equity Capitalization Rate (known as Cash on Cash), Break Even and Pay Back Period. These rules of thumb are important in analyzing the properties for the purpose of selecting the properties which need to be analyzed further and more in depth and apply a much more dynamic approach such as Net Present Value and Internal Rate of Return.  A deeper analysis can give a better understanding of the property and reuces the risk of your real estate holdings. This will help an investor to make a sound investment decision. Rule of Thumb are easy to apply and can be used as a benchmark. Quick calculations are necessary sometimes before you spend a lot of time and energy in analyzing the property. In the analysis, other factors such a location, development in the area and demographics of the area plays an important role as well. The bottom line of an analysis is to reduce the risk and Internal Rate of Returns plays an important role in this and is an important tool.    This brief summary is just a tip of an iceberg. In order to make your sound real estate investment, please contact me. I will be more than happy to sit down with you to discuss your real estate investment strategy and goals and assist you in the process of acquisition of your property.