How to Intelligently Invest in Real Estate Property
The first question on every prospective investor's mind is how does one intelligently invest in real estate properties, which one that is capable of delivering the greatest ROI? Well the answer is simple, as an investor you need to know what to look out for and hopefully by the end of this blog you’ll be familiar with a few of these metrics and indicators and have a better understanding of what it takes to invest in real estate property.
Before a property can be deemed "investable", the investor needs to evaluate a few macro-economic factors that affect the whole region instead of a particular property. The most important fact is the current job market and further prospects of employment growth. If a job market for a particular region grows at a steady pace, it induces labor migrations, which creates new demand for property while pushing the price of rental property upwards on the chart.
Similarly fiscal policies also have a great deal of impact on the real estate property market, as fiscal conditions have an inversely proportional relationship with affordability. Changes in interest rates greatly influence an individual’s ability to purchase a residential property. When fiscal policy is tightened, i.e. increased the cost of acquiring a mortgage increases and vice-versa.
A rent-to-value ratio is a quick and easy way to understand the potential cash-flow of investing in a particular investment property. R/V is the monthly rent which is divided by the total cost of acquisition or purchase. Generally a value of beyond 0.7 is considered acceptable however you want a value of over 1 as your ideal benchmark.
Another simple and easy financial metric is the cash-on-cash return, which helps determine the real rate of return regarding a potential real estate investment. Cash-on-cash return is the net cash-flow which is divided into the total cash invested, you want the rate to be higher than your other potential investments.
It is important to understand that these metrics are an attempt to predict the future performance of your investment. However, they should be taken secondary to other more organic forms of evaluations. For example, the physical condition of the property, overall market conditions and various other screening processes such as:
- Capitalization rate factors expenses, vacancies and incomes while discarding the effect of debt servicing. The advantage of using this is that it factors in both incomes as well as expenses. However, it can easily be tampered artificially by deferring expenses.
- Delinquency ratio is extremely important as well as it gives you vital information on management factors such as tenant screening, eviction processes and collection efficiency. Properties areas where delinquency rate is higher than normal, usually requires addition evictions and maintenance.
- When you’re determining if a property investment is worth the amount you’re about to risk, you’ve also got to look at it from the layman’s perspective such as the quality of the property. Would you live in it? Is the location safe, how is the neighborhood, are people moving out from the locality or moving in. Is the price of the property reasonable or is it too inflated? These few questions are extremely important as you go out to invest in real estate, as a matter of fact these are important any all forms of investments.
Now that we've discussed what to look for when you want to create a decent real estate investment portfolio and as you become the next real estate mogul, you’ll need the best property manager to help you along your way. After all someone’s got to look after all the new properties you’ve added to your portfolio. Since best practices in property management are integral to the long term success of real estate investing, you can contact the best property manager in Atlanta, Georgia.
Marina Shlomov, a managing partner at ALH|Podland Realty & Rental Homes Property Management is the author of many articles on Landlording, Property Management, and Real Estate Investing. A residential builder in the state of Georgia since 1999, Marina is an investor herself. Her property management company is intended “For Investors” and “By Investors” for a simple reason – she knows what investors’ goals are and she works hard to reach their goals. In her spare time, Marina likes to spend time with her family, friends, garden, read and travel. Check her out at www.alhpodland.com. You can find Marina’s articles and comments at @rentalhomesatl on Twitter, on Facebook, Google+, Blogger. and YouTube, Bigger Pockets and REI CLub and LinkedIn.