Buying an Investment Property
Investing in real estate has been a solid and stayed avenue to wealth generation for centuries. There are 4 main types of investment property. They are residential rental units, commercial leasing, land development and speculative building. Investment deals can consist of just one of these components or all four. There is one widely universal method for comparing the attractiveness of a real estate investment opportunity. This method is known as the capitalization rate. Cap rate as it is referred to is a simple equation of the project’s annual revenue divided by its total cost. This equation will render a percentage hopefully in the 6-11% range.
Residential rental units are the most popular types of investments for beginners. A residential investment is relatively easy to analyze. The main goal for a residential unit is “cash flow”. Cash flow can be defined as the amount of money left over each month from the rental income after deducting expenses such as mortgage payments and a per month share of expenses such as taxes, insurance and any utilities that the renter does not pay. Cash flow is most easily expressed in dollars per month however; the multiple that describes the amount is called IRR or internal rate of return. The formula is total expenses divided by total income.
Commercial leasing is one of the more complex types of real estate investing. The simple way to enter this type of investment is to buy an existing building with existing tenants. The capitalization rate will guide you on the feasibility of this type of investment. The other way to enter this market is through building a commercial building. One of the biggest challenges is determining demand for rental space in a particular market. The residential markets are much more transparent and documented than commercial and therefore easier to determine where and what to build. Once you have determined that there is demand for space than you must find vacant land with the appropriate zoning. Your Realtor® can assist you in obtaining zoning information for the area. Your Realtor® can also assist you in finding a reputable commercial construction contractor.
Land development investing can take many forms. One way is to create a housing project or subdivision on vacant land. This is the more complex process since it usually involves land use hearings and zoning amendments to the parcel. This process is known as a P.U.D. or planned unit development. A P.U.D. is essentially a site-specific zone plan that consists of specific parcels, uses and design. The entire plan is recorded and must be built out exactly as the plan specifies. This will include road layouts, parcel sizes, open spaces and parks and total square footage. After approvals are received usually some sort of infrastructure must be put in place like roads, sewers, water lines, drainage, fire hydrants, stop lights etc. This part of the process is hugely expensive and is only the first step on the rood to revenue through sales of completed components such as housing or rental spaces.
Speculative building is the riskiest of the 4 types of investing illustrated. Spec building as it is called usually refers to residential building. It is basically the process whereby the investor is creating a unit for which there is demand. There can be a large upside one time return at the sale of the home. There can also be a large downside if the investor must carry or sit on an unsold home.
Regardless of the method used to enter the market. Choosing the right Realtor® to help you through the purchase or sale of an investment property is important. A good Realtor® can counsel you as the investor on demand and other market statistics that can help you decide which opportunity is right for you.
Tru Real Estate is well versed in the analytics of the 4 above-mentioned types of investment. Call us and we will find the right opportunity for you. Plus we will donate 10% of our commission to your favorite charity in the process.
