The 4 biggest factors to win big with investment properties
There are many elements that go into investing. It’s impossible to justify a single factor and measure the success of an investment just on that. Although every investor might have a preferred type of investment, a specific investment criteria, a formula, some hidden tricks or gimmick up their sleeve, at the end it all comes down to math. By understanding some math, specifically algebra basics, we can have a consistent formula to measure whatever we call financial success.
Today, I would like to showcase the top 4 biggest factors to win big with investment properties.
Factor 1: Income
When looking at investment real estate, it’s very important to start with the top line: INCOME or REVENUE. Without any income or revenue, your money invested will have production. You money will not work for you. Many investors know that focusing on price is irrelevant without knowing the present income as well as future potential income of an investment property.
There are multiple ways that you can get the present property income. Typically, on smaller residential rental properties, under 40 units, or smaller commercial plazas with a handful of tenants, those might be owner managed and the bookkeeping might not be in accordance with GAP (general accounting principles.) Nevertheless, any records for the past 12 months or longer will provide a good idea on the rental income and any fluctuations in occupancy.
Factor 2: Expenses
You might have heard before that it’s not how much money you earn, it’s how much money you keep. If you have more expenses that your revenue, you will always be in debt and have to find outside sources to cover those expenses. Again, the expense records can be requested from the present owner or property manager. It’s always good to really go line by line on the expenses as sometimes you will find that some expenses might not be recorded or accounted for and unless you plan on hiring someone or doing it yourself, it will affect your final net operating income.
Factor 3: Rent Increases
Many times, there are opportunities for under-performing properties to get the inspirations and visions of the new owner. The new owner might see that there are ways to improve or better the property and hence get increases rents. Sometimes it’s the simple things like adding lighting, adding signage, general clean up, improved marketing that might earn you just a little bit more every month. Many times building owners who have owned the investment property for a prolonged period of time will actually have below market rents because they feel they have a friendly relationship with their long term tenant.
Factor 4: Capital Gain Tax
This is actually a 2 way street. The buyer may need to buy because they recently sold a property and not need to park the capital gains cash to avoid tax penalties. The seller might need to sell because they have identified another asset they would prefer. Capital gains is the power of investment real estate where you can take advantage of natural as well as forced appreciation at time of sale. The best part of capital gains tax is that it can continue to be deferred, always check with your tax adviser on what can be done in your scenario.
In conclusion, there are always multiple factors to consider when investing into anything. Acknowledging that you must be aware of multiple items and establishing an investment criteria for yourself is key. Also performing your research and due diligence is necessary. If you want to learn more about the 16 contributing elements that I personally look at when analyzing investment properties for my clients or my personal investment, I encourage you to check out this video below.
Remember, unless you learn how to invest and make money work for you while you sleep, you will work until the day you die.
Happy investing!