It has been said that real estate is a safe investment and one of the highest provider of return on investment. While this is true, some questions may be raised about the downside of this investment. In what ways could a person lose in this kind of business?
The consistent appreciation of real estate value is your constant profit. Every year, you get about 5% return, whether you utilize your property or not. Some people may be happy with this arrangement. However, there are some things that should be taken into consideration. If you are managing a piece of property or more, the financial status of properties needs to be examined at least every quarter to make sure you get the updated report. Or, if you wish to purchase a unit, then take a look at the potential cash flow. Sometimes, projections can be misleading. Some things you have to look out for are as follow:
1) You will indeed get a sure appreciation value every year, but this figure varies from region to region, and from state to state. Check the current rate of your region, you may get a lower or higher rate.
2) Check the interest rate. Is it too optimistic?
3) Examine the actual operating costs involved in the property. How about the interest rate of these expenses?
These things need to be assessed in order to paint a clearer picture of the profitability of any property. Sure, you have the constant appreciation, but is it enough to compensate for the operating cost and the interest of mortgage fees? How about other expenses such as taxes and miscellaneous? Remember that while your property appreciates every year, so do materials and other expenses.
If you are managing a rented or leased out property, having your financial status updated will help you decide whether you should raise your monthly rental or not. In case you are involved in buy and sell, you will also have the idea how much to sell especially if you have undergone some renovations. On the other hand, if you are considering buying a property, this will be your starting point before making a decision. The moment you see a negative cash flow, common sense will tell you it’s not worth it, no matter how promising the appreciation value is. A cash flow can be determined by subtracting all the expenses from the rent you get from the property. If you get a negative figure, then you have a negative cash flow.