How to Know if a Real Estate Investment is Worth Investing?
Posted by business | investment | Posted on January 23rd, 2010
Kicking off the evaluation process is the toughest for us. Question after question kept popping up “Is the property market low enough?”, “Is this property worth considering?”, “Are the numbers the only criteria for investment?” What are we really looking for in real estate investing?? Quick bucks $$ or Regular income…
Bottom-line = Money!!!
Property Agents have tons of recommendations for YOU! How will you know whether they are good investment for you?
There are many factors that need to be considered in evaluating a real estate investment. For example, location, environment/neighborhood, facilities, financing options, rental income, etc. If all above works, it is time calling your agents and set up appointments. Happy Viewings!!!!
Actually it is not difficult and it does not need much of your time to know if a real estate investment is worth investing in the first place. All you need is crunching some numbers with your calculator, and Bingo! You can decide whether the property is worth investing.
Later in this article, we will show you how these numbers work in your prospective real estate investment by two real life cases in Johor Bahru, Malaysia.
Numbering GAME
Numbers, numbers and numbers.. How do you get them?
You may try calling a few property agents, check with banks on properties valuations and of course there is plenty of information on the Internet. Once you have these numbers you can determine if a real estate investment is worth spending your time for a viewing. “Seeing is Believing.” Check out the property to see the actual condition and the environment, whether it is to your liking once you get your numbers RIGHT! Once you get your numbers, you will see:
Incomes
One-time income – selling price
Regular income – rental price
Costs
One-time expenses (startup costs) – down payment, agent’s brokerage, legal fees, stamp duty, furnishing cost, etc.
Regular expenses (monthly costs) – monthly loan repayment, monthly maintenance fee, quit rent, property tax, etc.
See how they (numbers) work..
The basic requirement for a good real estate investment is that the income it generates must be more than its costs.
If the selling price of a real estate investment is more than its purchase price and startup costs, this investment generates capital gain.
If the rental income of a real estate investment is more than its monthly expenses, this investment generates cash flow.
If you are looking for capital gain, the gain or loss depends very much on the real estate market. Hoping to make money from capital gain on real estate is like buying a product and hoping the value of the product will go up with time. On a long term basis, real estate will be appreciating in value because of inflation, but the gain is not guaranteed.
On the other hand, a real estate investment that generates cash flow effectively put money into your pocket every month, while your equity in the real estate investment increases over time. This is the real estate investment that we are looking for – an investment worth investing.
Too good to be true?
With this recession time, you will ask yourself, “Is it the RIGHT time for me to start investing in real estate? Everything is so uncertain NOW.”
In Johor Bahru, you can find plenty of real estate investments worth investing at this juncture. We discovered most of these investments that generate substantial cash flow are mainly apartments or condominiums. You can read from our upcoming article to know why apartments or condominiums are better real estate investments in Johor Bahru. Here are two recent real life cases of real estate investments worth investing in Johor Bahru.
Case 1: We found a condominium in Larkin area of Johor Bahru in Octorber 2008 selling at $160,000 with existing tenant. Monthly rental income is $1400 while monthly maintenance cost is around $300 (maintenance fee plus sinking fund plus quit rent).
If we finance 90% of the purchase price to buy this condominium with interest rate 4.85% with a tenure of 30 years, monthly loan repayment is estimated to be $760. Thus, this condominium is generating a net cash flow of $340 every month, $4080 every year.
Total capital outlay for this investment is $24,000 for down payment including other startup costs like legal fee and brokerage.
Effectively this investment gives us a yearly cash-on-cash return of 18.5%. In other words, within 6 years we would be able to take back our capital $24,000! The best thing is we still own the condominium. It will keep putting money into our pocket every month. We also have the option to sell it away when the market is good.
Case 2: There is a 3-rooms apartment in Tampoi sold at $125,000 in Octorber 2008. Monthly maintenance cost is about $150. If we finance 90% of the purchase price with interest rate 4.85% with a tenure of 30 years, monthly loan repayment is estimated to be $600.
Expected rental income for a fully furnished apartment in the area is about $1200. With furnishing cost of $10,000, total capital required for this investment is around $27,000, while total monthly cost is $750.
The apartment is expected to generate a net cash flow of $450 every month, $5400 every year. Cash-on-cash return on this investment is 20% which we can expect to take back all the capital within 5 years.
Sound interesting right?
Of course, so far we are only talking about numbers. A good real estate investment does not rely on purely numbers. You still have to go and have a look at the building structures, study the location and neighborhood, and perform other checks before you make your decision. What we have discussed, however, can save you time and give you more ideas on the potential returns of a real estate investment before you tell your agent which real estate you want to view in the coming weekend.
Read more about real estate investment tips at http://reijb.com
We write regularly about real estate investment. Some of our featured articles include:
“How to estimate the value of a property?“
“Why apartment can be the best real estate investment?“
“How important is location to an investment real estate?“
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Since those books were written during better times -much of their advice wont apply.The days of quick big buck flips are gone. Right now it is a market judged soley by the individual…Some say its bottomed-out-others say not yet…The only thing I can suggest is watch the market in your area to see what things are selling for to get a feel..,the only thing i am comfortable with right now is rentals that cover the mortgage and pay for themselves over time,,,basically long term investments….If we knew where rock bottom was we can be rich…I don't see it yet–there are too many foreclosures out their that continue to drive values down.
You don’t always have to take big risk to make money heres an example, search “rti recoiless” these guys are on the move big time.
With the market the way it is, now is the best time to buy. We've bought 3 properties in the past few months at dirt cheap prices. Now the government is giving a first time home buyer incentive, and that's a plus too. Be aware, that if you buy a property, and resell it, you have to pay capital gains if you haven't lived in it as your primary residence for 2 years. Have you thought about rental properties? Say a 2 unit…live in one side and rent out the other side. You are very lucky that you are handy and can do the work yourself. That will save A LOT of money! If you purchase real estate at a low price, and don't have too many expensive repairs, you can't go wrong.
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Congratulations on starting at such a young age. When it comes to investing, time is your biggest ally.
First, if the money market account allows to write checks, use a debit/atm card to access the funds whenever you want without limitations, put all your money into that. The risk associated with money market accounts is extremely minimal. For all intents and purposes no different than a savings account.
For your long term investment needs, a mutual fund is considered very safe. Mutual funds are a bundle of many stocks that you invest in together. This results in diversification of your investment, reducing the risk significantly. Using index funds are a great way to keep the administrative fees low and be highly diversified at the same time.
Another investment you may want to consider are Exchange Traded Funds (ETFs). ETFs are essentially mutual funds traded on the stock exchange like equity stocks.
There are pros and cons to each. With mutual funds you can set up recurring deposits at minimal or no commission fees. With ETFs you'll incur higher commission fees (but lower administrative fees).
information regarding mutual funds:
http://www.ehow.com/how_5483394_start-investing-mutual-funds-online.html
Exchange Traded Funds:
http://www.ehow.com/how_5684160_invest-using-exchange-traded-funds.html
Information on Index Funds:
http://www.ehow.com/how_5688174_make-money-index-funds.html
In the meantime, while you're watching your initial investment grow, try your hand at virtual stock trading. This way you can get a feel for the market and buy/sell individual stocks with no risk.
virtual/mock trading information:
http://www.ehow.com/how_5609336_mock-trade-stocks-online.html
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