There is no straight path to wealth, but if one comes to understand the real estate industry and if you deepen your own firsthand experience as a buyer and seller of investment properties, one will find the path to wealth. There are six core principles that will make or break an investment deal. Known as the Big Six, they are the most important concepts to learn in investment real estate.
Location: Location is the most important component of any real estate deal. Look for properties situated in an “A” location. These locations include socioeconomic levels of the people who live or work in a particular neighborhood, its proximity to shopping centers, public transportation, crime levels, the nearness of prestigious universities and medical centers, traffic congestion, zoning restrictions, quality of schools, fire and police protection, and the reputation of the local government.
Building Quality & Design Efficiency: Building quality and design efficiency are related to each other and need to be seriously considered when finding an investment property that is favorable. Properties that far exceed the minimum construction requirements that utilize innovative design elements. Design features to be on the lookout for are walk-in closets, large kitchens with windows, and his and hers bathrooms. In a professional office building investment a common factor is a ratio of four parking spaces for every 1,000 square foot of rentable space.
Tenant Profile: Tenants can either be an asset or a liability in an investment. A good tenant profile is just as important as a well-constructed and well-designed property. Stable tenants with appropriate lease agreements are most desirable. Find out how much rent is generated and whether it is at market rate or under market. Focus on finding an income property that offers opportunity to increase rental income, by doing so, multiply the value of the property so that you can resell it at a substantial profit.
Upside: This fourth element refers to the cash flow, and the growth possibilities offered by a particular property. A property may cost $1,500,000 to construct, but if it brings in only the income of a $900,000 property, then it is worth only $900,000. The key to increasing value lies in buying a solid Class B property in an “A” location where the rents are under the market, the leases are short term, and there are no options to renew the leases.
Financing: The free flow of money and access to credit is what adds vibrancy to property investment. The first thing to do before applying for a mortgage loan is to review all credit reports and credit scores. Take time to learn the language and components of a mortgage and how they interact, and be open to the full range of financing options available. Banks and other financial institutions make money from mortgages, they are willing to negotiate, so, be creative, and the terms able to be obtained from the bank or insurance company might surprise investors because of today’s low interest rate environment.
Price: The successful evaluation of a property’s price has to do with how much information is gathered about the seller and the property than the price tag on a real estate deal. Look at the value of the property, which is not the same as the price. The crucial concern is not how much the property costs, but what kind of revenue it can generate.
Master the Big Six and the wealth will be within reach.
Source: Kenneth D. Rosen