Upside Rent Potential – Panning For Real Estate Investing Gold
Real estate investment decisions are created on the investor criteria. Unless the particular rental property serves some other objective, perhaps to close a 1031 tax exchange in a hurry, capitalization price, internal rate of return, money on cash return, or a few other factor or combination of all aspects, tell the real estate investor whether to help make the investment or walk away. Real property investing, after all, is all about the amounts.
There is, however , the matter associated with any “upside rent potential” associated with the income-producing home that prudent real estate investors should think about before making investment decisions. This is not really always the case, though. Remarkably, there are occasions real estate investors pass on good expense property opportunities because they fail to think about the potential of a property’s upside in rental income adequately.
An income property with “upside rent potential” basically implies that its rents are reduced then what the market will keep and the “potential” to collect higher rental prices and generate more income are an actual possibility. To the real estate investor examining the income property it means, “hold on, and don’t make any decision to pass on the property until you’ve reevaluated the cash flow based on several other rent scenarios”.
Believe it or not, sellers (or their agents) sometimes, whether simply by neglect or faulty research, perform fail to consider the property’s true earnings potential when setting a price. If so , then any APOD, Proforma, Marketing Package, or other earnings and expense statement presented a person, at the very least, distorts the income each key rate of return leading your investment decision. If unchallenged, and you also rely on those numbers, and consider them unfavorable, you could pass up a great investment opportunity. It happens.
Always carry out your own rent survey. Know exactly what comparable rental properties in the area are becoming for rents and then make your own assessment of what the market will keep. You might uncover something the vendor overlooked, or perhaps discover that the seller established the price for the property with no thing to consider for upside rent potential whatsoever.
Then run your own numbers. Using the rents you regard even more in line with the market, recalculate the expense property’s cash flow, cap rate, money on cash, internal rate associated with return and other financial measures. Who knows, you could discover a nugget of the deal you might otherwise have skipped. It happens.