Are you ready to invest? Many think it is the time to start, each with their own reasoning as to why. Beware that most are not prepared to start. This is because the majority of investors are really speculators, and for the most part, gamblers. They are gambling that their hunch is right and take a cue from what they see around them, such as others making money in real estate. Investors are different. They have a solid plan. They have calculated the risks and the required return that makes financial sense. Let me give you an example.
Recently I was told by an acquaintance of mine that she had bought a 2 bedroom condo at an auction for $105,000. She planned to rent it for $1500/month. It was nearly in turn-key shape. She figured about $1000 more in appliances would do the trick. She put 50% down and mortgaged the rest. According to her calculations, she was earning an 12% return on her investment after making the loan payment, and the return rate would only go up from there. So I asked her, what was her modified internal rate of return (MIRR), cash-on-cash return, and what rate did she use for the Net Present Value (NPV) calculation? She had no idea what I was taking about. Sadly, this is the norm. She felt she was an investor, but in reality she was speculating.
I did an informal analysis of her investment. I found that in her 1st year, the Modified Internal Rate of Return was actually a negative 14.5%, and would not stabilize till about the 5th year at 8%. The return on her equity in the home would run about 9% for at least the next 20 years. The Net Present Value rate was 6%. Cash-on-cash return was 9.95% in the 1st year. The numbers did not match up with what she felt she would be making. Did she make a good investment? It really depends on her investment goals, but one thing we can see is that her calculations were off by a whooping 50%! Can you afford to be 50% off on your investment goals?
These are only a few of the investment criterion to consider before buying. There are many more and each has a different significance depending on what you are trying to accomplish. Our recommendation is if you are thinking about buying a property for investment you should seek the guidance of an experienced investment real estate agent. We also suggest you read as many quality investment articles as you can to ascertain the competency of the agent you chose.
You are welcome to browse Reliantra’s blog for informative investment articles. Join Reliantra’s RSS newsfeed or email list for our latest updates and investment project case studies. From time to time, Reliantra seeks investors to join in on an investment projects which is a great way to get started in real estate investing without having to take all the risk yourself