A "good real estate investment" can mean different things to different people. For this article, the definition of a good real estate investment is: A real estate ownership interest, whether a personal residence or rental property, that increases one's net wealth by a fair rate of return on their invested cash equity; for the corresponding amount of risk they are taking by owning a relatively high risk asset.
What that means is that if you are going to put your invested cash equity into real estate, your net worth should improve by a greater amount than if you invested in a similarly risky asset. And "invested cash equity" isn't the property price; it is how much cash you took from your bank account to acquire the property minus down payment, plus closing costs, plus rehabilitation costs.
Realize a lot of things can go wrong with real estate ownership, so you had better get a fairly high return on your invested cash equity for it to be a "good deal". So you ask, how would one figure that out?
For investment properties
Your returns are part cash flows and part appreciation in value. For example, if your property rental income minus expenses produced $250 per month positive ($3,000 per year); and your invested cash equity was $50,000, that's a cash on cash return of 6.00% ($3,000/$50,000). And that is a pretty good deal in real estate.
To add to that, let's say you project net appreciation in value contributing an extra 1.0% or 2.0% return per year (after subtracting your projected estimated costs of capital repairs and improvements). Summing the cash flows and net appreciation could equal about a 8% to 10%+ projected return per year on a long term basis; and if you achieve those numbers..... this is a good real estate investment!
Some investment properties don't cut it! Most high end properties, where the net rental income is very low compared to the purchase price, usually have projected negative cash on cash returns. So if you buy a property with negative (4.0%) cash on cash returns, even if it appreciates 2.0% per year, you are typically at a 0.0%, or worse, return on your equity cash investment. And that isn't a deal most experienced investors would go for.
For personal residences
You will also be putting down a large amount of cash equity and the calculations are really a little more complicated and difficult because you need to look at how much you are paying in housing expense versus how much that amount would be if you were just renting someone else's property. So the overall question again is, "Is your wealth going to improve by owning the property?"
As a general rule, if you are not planning to own it for at least five years you will most likely not be adding to your wealth. Any appreciation in value will not compensate for the 8.0% to 10.0% transaction costs on the buying and selling of your property. And even worse, the monthly ownership expense is usually higher than if you just rented a similar property. Therefore, if you don't plan to own the property a long time, and the longer the better, you will probably do better renting and leaving the hassles and costs of ownership to a landlord.
So a good real estate investment is really one that will increase your net worth over time. The longer you own it, the better the chances for that appreciation in value and wealth building.
As proof positive on this, find someone who has owned real estate for 20, 30, 40 years and ask them what is a good real estate investment? It is generally easy to find them, they are retired, and living comfortably.
Author: Stephanie Danielson, Broker & Short Sale Specialist (CDPE Certified)
Stephanie Direct: 612-242-8747 or firstname.lastname@example.org
Acuity Group Specializes in Buyer/Seller transactions, Short Sales, Investment Property, Rentals and Property Management. Located at 601 Main St. Elk River WWW.ACGPROPERTY.COM
Short Sale Experts, Consultants & Specialists serving the following Minnesota Cities: Elk River MN, Zimmerman Minnesota, Big Lake MN, Rogers Minnesota, Otsego, MN, St. Michael Minnesota, Albertville MN, Princeton MN, Ramsey Minnesota, Anoka MN, Nowthen Minnesota, Monticello MN, Otsego MN, Oak Grove MN, Burns Township Minnesota, Monticello MN, Champlin Minnesota, Dayton MN, Hassen Township Minnesota, Coon Rapids MN, Blaine Minnesota, Fridley MN, Oak Grove MN, St. Francis Minnesota, Livonia Township MN, Andover MN, Becker Minnesota, Baldwin Township MN, Orrock Township, Minnetonka, Chanhassen, Chaska, Excelsior, Wayzata, Plymouth, Maple Grove, Golden Valley, St. Louis Park, Hopkins, Edina, Eden Prairie, Crystal, New Hope, Bloomington