Nobody gets into the real estate investment business with the intent to lose money. No matter whether the property is bought and held onto for a short period of time, or for many years, the object of the investment remains the same: to turn an eventual profit. The key to calculating how much of a profit you can earn on a real estate investment is to subtract the total amount of the purchase price and property renovations from the future sales price. As every investor knows, however, the resale value is determined by the market and the available buyers. For that reason, every estimate of profit must begin with a reasonable calculation as to the price a competent buyer will agree to pay for the property. Determining that price can be a bit tricky, but a good estimation can be had if you know where to look.
The first step is to examine similar properties to see what selling price they commanded. Do not attempt to compare apartment buildings with office space – only compare properties that are similar in location, usage, and condition. You can also check with your local appraiser to see what the market cap rate for those similar properties was, and use a similar rate for your own property. Above all, be fairly conservative in all of your estimates. A good rule of thumb is to price your properties slightly less than the most valuable real estate in your area – even if your property warrants a higher value. Prices near the apex of the area limit always cause properties to move at a slower pace than more moderately priced units. When your property is obviously of greater vale than others in the area, it can be hard to restrain yourself from pricing your property at the value you are certain that it deserves – but your property will move much faster if you set a lower price.
The next step is to calculate your estimates of cost. While there will be a number of expenses that you will entail as you bring a property to market, investors will only care about how much rental income the property can generate. Your sales price will have to be based upon that income possibility, so make sure that your costs remain within your budgetary restrictions. Knowing what a property can generate for rent will help you to budget your improvement expenses in advance. Overhauling the entire property will not win you any points with most buyers, unless it is evident that the improvements will increase the rent potential.
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