Travis Dyer

When you are looking at purchasing a property for real estate investment, one of the first items you need to look for is comparables. Professional real estate investors don’t rely on others price opinions but rather form their own opinion on the value of the property. This article identifies the 5 ways for re investors to feel comfortable with the price they are paying.

1. QUALIFY THE AGE OF COMPS - This is never as important as in this particular market as the prices are in a state of flux, and sales which are being recorded are distressed sales and as such may undervalue the true value of a Minnesota real estate investment property-which is good news if your buying.
2. UNDERSTAND THE DISTANCE - So your comparable states its within 200 yards of the target house, perfect, well maybe not it could be in a vastly different sub-division or area. If you are not intimate with the area, check using a online aerial map service to see if it is in a similar neighborhood.
3. QUALIFY THE SOURCE OF COMPARABLES - Does the provider of the comps have a vested interest in skewing the comps? Real estate investment can be a tough business and like the ancient Romans, who knew a thing or two about betrayal, said ‘Caveat Emptor’, or buyers beware. Ask an agent for comparables who isn’t involved with your transaction. Most Realtors will be happy to help, particularly if you hint heavily you re looking for a good agent to look after the property once you have bought it.
4. TRULY COMPARABLE - Is the comparable truly comparable? You might have a comp for an 1100 sq ft apartment which is the same size as the target and within the same zip code, however its still crucial to ascertain whether there is the same number of bedrooms, bathrooms, has it a garage or not? To put it into perspective an extra bathroom can easily add $5,000 on to a property, in the same vein a garage can add $10,000. Other factors that can affect the value in this way are the size of the lot, and the view.
5. AGE - The age of investment property is important to understand as a newly built property carries a premium over a property 20, 10 or even 5 years old. This is partly a case of perception and also because appraisers consider the economic life span of a building. Typically 65 or so years and of course the less time left the less its worth.

Of course this is just a quick overview to give you an idea of the most pertinent factors that you need to evaluate when looking at comparables. The golden rule is to question everything.

In today’s recessionary and challenging marketplace it is sometimes easy to forget what the fundamental benefits of real estate investing are, and, looking forward, how they can be applied to the current opportunities that still exist. There are five widely held benefits of real estate investing and these are detailed below.

1. Leverage: This is the core principal of successful real estate investing and can be defined as: the act of using borrowed funds in order to supplement a relatively small deposit by an investor or entrepreneur in order to execute real estate purchases. The equity of the property is held as collateral against the borrowed monies and they will be redeemed when the property is sold. The act of leveraging means that the investor’s returns can be magnified many times. If you buy a house for $100,000 and sell it for $110,000 cash you make $10,000 or a 10% Return on Investment (ROI) if however the same example is leveraged at 90% then while you still make the same $10,000 this time it is a ROI of 100% or ten times greater than the cash only version. The fact that real estate can be leveraged so readily is relatively uncommon amongst other investment categories such as Shares, Equities and Gilts and this fact is a main reason why many private individuals continue to invest in real estate. In general terms the higher the leverage, which can be achieved, while the income still covers mortgage payments is the ideal scenario for maximizing returns.
2. Tax Breaks: The IRS is fairly friendly to the real estate investor and there are several valuable tax benefits to owning investment real estate. Firstly there is depreciation; the IRS requires the investor to depreciate their investment property. The advantage for the real estate investor who is just starting out building their portfolios is that they can reduce the tax they pay on the rental income by deducting a portion over the cost of the property over 27.5 years for a residential investment property and 39 years for a commercial investment property. There are also tax breaks for the capital gains which is known as a 1031 exchange, succinctly put, this means the capital gains realized from the sale of one investment property can be deferred by the qualified purchase of another, like for like, property. This means rather than having to pay tax on the gains, one can roll over the gains and so increase the amount of capital invested of ones holdings in a tax-free manner.
3. Tangible Asset: It is ironic but the fact that real estate has a physical presence has certain psychological advantages. This manifests itself in several ways, amongst which is pride of ownership. Pride of ownership of a real estate investment is a natural reaction, and it creates a feel good factor that should not be underestimated. Apart from the psychological advantages, the physical presence of real estate has several advantages over shares and other equities as, their value may be completely wiped out by any number of circumstances beyond your control as a shareholder. Real estate is a tangible asset that will always retain a significant portion of its value, either by its replacement cost or the intrinsic value of the land. Lastly the tangible nature of property means that investors can literally see where their money and wealth is.
4. Passive Income: One of the most sought out of Real Estate goals is for investors to achieve financial freedom by receiving rent from tenants on a monthly basis. Typically this is easier to achieve when the mortgage is paid off, however even while you are amortizing your loan you are creating passive earnings as the payments you make pay off part of the principle each month. The annualized amount that this adds up to along with the rental minus finance costs is called the Internal Rate of Return and this is the calculation which most professional investors use. This calculation is used by professional and institutional investors as it gives a complete level of return on investment as oppose to the rental yield which merely gives the income against cost ratio.
5. Hedge against Inflation: Property is generally perceived as being a good hedge against inflation. There are several reasons for this; land is one element of the hedge as land has historically always outperformed inflation since records began, Construction Costs are another element and these typically are a good barometer of inflation and tend to keep pace with inflation. Lastly the finished product as a whole, in most cases, provides an income that in itself offsets the effects of inflation. Many Real Estate investors have the strategy of purchasing their rental properties with interest only loans with the view that when the capital comes to being paid off in 20 or 25 years time inflation will have eroded the cost of capital in real terms. For example an average home bought in Florida in 1980 would of cost $45,000 if this was bought on an interest only mortgage and the capital came due in 2000, the $45,000 would be worth $89,000 in 2000 dollars, or alternatively the homeowner would need to find only $23,000 in 2000 dollars to pay off the loan. This is clearly a great hedge against inflation.
6. Due Diligence: A big advantage of Real Estate over other investments such as Shares and Equities is the fact that a typical investor could carry out all the required due diligence needed in order to satisfy themselves that the price they are paying and the price the can reasonably expect to achieve from rent or resale is realistic in any current market conditions. With Shares and Equities, the information available is published once or twice a year and is necessarily subject to time lags. Real Estate value can be ascertained by speaking to Realtors, using tax records, courthouse documents and various online tools to ascertain the market value and the market rent. This quantifying of risks is a major advantage that Real Estate has over other investments.
7. Equity Build Up: Buying property is one of the best ways for investors to build capital or equity. This occurs either when they buyproperties at less than market value or when the property appreciates. Given the current market conditions it is unlikely that the latter will occur in the next 12-18 months however there are opportunities that exist in order for the investor to purchase properties below market value. Effectively this works in the following way if the investor purchases a house at $100,000 that is worth on the open market value of $150,000 they have effectively built up $50,000 in equity, which can be achieved when the property is sold.

These are the time honored and major benefits of investing in Real Estate, of course there are others that are applicable in various situations. Investing in real estate can be very profitable and rewarding in any market providing you use these factors to your advantage. When purchasing an investment use leverage whenever you can to maximize profit, use all the tax breaks that apply to you, and undertake professional due diligence whenever possible. Be aware of the long-term benefits such as Inflation Hedging and building passive income and equity and you can make real estate investing profitable whatever the market is doing.

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Travis Dyer