Investing in real estate is one of the smartest and most lucrative investments that you can make, with huge potential for both long term growth and monthly cash flow. Real estate is the king of investments and is unrivaled for its potential to create massive wealth in relatively short periods of time. But of course, like all investments, investing in real estate comes with its own risks, and if you select a bad property, you could end up losing money big time. Here are a few tips to help you measure a successful investment property correctly and make smart investment choices.
The first way that you can measure a successful investment property is by looking at the cap rate, or the capitalization rate, of the property. The cap rate is a measurement of the expected rate of return on a potential property based on your estimates of expected rental revenue. You can calculate the cap rate of property by taking the expected yearly income for the property minus all operating expenses and multiply by the “cap rate” of the market you are buying in, which will usually be between four and ten percent. If you want to buy a property that makes $100,000 net profit per year at a cap rate of, say 5%, then a solid offering price would be two million dollars.
Another important metric to keep your eyes on to determine a successful investment property is the cash flow. A good investment property shouldn’t just generate value by increasing the property value over time but should also be making money every single month in rent. But some properties do not make enough in rent to cover the expenses. It can be tempting to sell a property that isn’t cash flowing. Just remember that you can still make money in the long run by selling the property after it has increased in value for a few years.
The final way to measure a successful investment property is if the property value has been increasing, decreasing, or stagnant. Knowing the value history of the property you are looking at as well as the surrounding area is important for understanding whether the property value is expected to increase or decrease in the future.
Finding a successful investment property can be a major challenge for new investors. But knowing what to look for can make the search much easier. Start with these three metrics to determine whether or not a potential real estate investment will be successful.
Check out these 4 factors to look for when considering an offer!