One of the best long-term investments you can make is in investment real estate. Those that invest in real estate successfully will not only see long-term value appreciation, but can earn short-term cash flow. While it can be a great investment, it is also complicated. One of the biggest complications in real estate investing is to understand if you are actually making money and how much you are making. There are several tips that should be followed to determine how much money you are actually making.
When you are trying to determine whether you will make money on a property, you need to put a lot of thought into your income projections. Your income projections should include a detailed analysis of market rental rates, operating expenses, and vacancy rates. You should then be able to use a market cap rate and gross rent multiplier to determine the current value of the property. Using the same cap rate and gross rent multiplier analysis, you should also be able to make assumptions about future values. This can then give you a better sense of what your total project ROI will be from the time you buy the property until you ultimately exit the project. It is important to also complete a sensitivity analysis based on changes to a variety of factors including mortgage interest rates, market vacancy and rental rates, and other real estate factors.
Current Cash Flow
When you’re trying to figure out how much money you are making today, you need to figure out what your current cash flow is. Your cash flow is the amount of money you have left over from rental income after all expenses and mortgage payments. A good way to compare one real estate project to the next, and to determine if you are making money, is by considering your cash on cash return. Your cash on cash return is your net cash divided by the amount of equity you put into the transaction when it closed.
When you are looking to determine whether you are making money in real estate investing, you also need to carefully consider your non-recurring expenses. Many real estate investors consider their recurring sources of income and expenses as their base cash flow, but at times will neglect non-recurring items that come up. Some of these can include major CAPEX replacements, legal costs, or unexpectedly high vacancy rates. When you are considering your ROI projections, you need to be careful about including these assumptions as they will have a major impact on the long-term cash flow of your property.
Other Value Creation
While focusing on the cash flow of a property is important, you also need to focus on creating value using other methods. One of the best ways to this is by improving the physical plant of the property. You can do this by renovating the property and also completing necessary repairs. This can not only result in a higher level of rent, but can also reduce the cap rate on the asset. Both of these factors can result in a higher property value.
Exit Strategy in Real Estate Investing
Ultimately, to make money on a real estate investment you’ll need to sell the property at some point. Before you even buy the property, you need to start thinking about who you will sell the property to, when you’ll sell the property, and what obstacles need to be overcome in order for you to maximize your sales price. Some good organizations to target for a future sale include commercial real estate investors and other organizations that may use the property for a specific use.