Ten Key Criterias for Real Estate Investment. How to invest in Real Estate. Real Estate Investor Guide to selecting best property investment.
Wednesday, July 22nd, 2009Real estate is land and the buildings and improvements on land. Real estate, by definition, includes natural assets, such as minerals, under the land. Because of the obvious limited supply of land, especially in “desirable” locations, real estate has long been viewed as an attractive investment alternative.
Real estate can be classified into four major categories:
1. land;
2. residential;
3. commercial; and
4. industrial.
“Land” can be subdivided into five categories: (a) unimproved; (b) farm land; (c) recreational; (d) ranches; and (e) subdivided lots.
“Residential” can be subdivided into three categories: (a) single family dwellings; (b) multiple family dwellings (such as apartments and condominiums); and (c) hotels and motels (transient dwellings).
“Commercial” can be subdivided into five categories: (a) residential rental; (b) office buildings; (c) retail stores; (d) shopping centers; and (e) specialty buildings (such as banks, movie theaters, stadiums, and bowling alleys).
“Industrial” can be subdivided into four categories: (a) factories; (b) warehouses; (c) industrial parks; and (d) utility facilities (such as power plants).
An investor should select the type of real estate that will best meet the specific objectives of the investment plan. For example, unimproved land can provide substantial, long-term appreciation, but cannot be looked to for a significant current flow of income.
HOW DO I SELECT THE BEST OF ITS TYPE?
Because of the unique nature of real estate, “best” is a relative term – at best. An investor should study each of the following major criteria:
1. Location of the property. This is the most important single factor and will determine present and future market demand.
2. Soundness of construction and appropriateness of design for intended use. Maintenance costs will be higher with poor construction and rental income may be lower than anticipated if the project is not suited for its intended use.
3. Cost of capital. The interest rate that must be paid on the purchase debt will significantly affect the ultimate profitability of the venture.
4. Financing fee. Requiring payment of “points” has become a prevalent practice. These are paid to the lender on both the construction financing and the permanent mortgage. Each point is 1% of the borrowed amount.
5. The cost of operating and maintaining the property. A review of the track record of the promoter/manager in similar projects is particularly helpful.
6. Organization and offering expenses.
7. Sales commissions.
8. Construction costs. (Check to see if the general partner’s fee will be reduced if costs of construction are higher than projected.)
9. Fees paid to the general partner for managing the partnership and the underlying investment property.
10. Projected cash flow and tax results from operations.
