Investing in Real estate Market
Investing in real estate is as similar as investing in stocks, from a quantitative perspective. The investors must know how to value real estate and how much profit will the property appreciation, rental incomes, or both will make. Accurate valuations of your real estate property will help you to make better decisions both in buying and selling of your property.
Capitalization rate in Investing in real estate
The capitalization rate is the real estate net value of appreciation or depreciation, and a required rate of return. The most important assumption an investor has to make is to choose an appropriate capitalization rate. Here are methods used to calculate an appropriate capitalization, some of them are:
- Build-up method
- Market-extraction method
- Band-of-investment method
Have a closer look at these methods
Build-up Method:
The build-up method is a common approach one can make. Start with the interest rate and add on appropriate liquidity premium – real estate illiquid nature, recapture premium – land appreciation amount, and risk premium – overall risk exposure of the real estate market.
Market-extraction Method:
The market-extraction makes the direct income capitalization more meaningful, by assuming that there is a current readily NOI (Net Operating Income) and sale price on comparable properties.
Band-of-investment Market
This method gives the most appropriate capitalization rate for real estate investments. The band-of-investment method is a capitalization rate that is computed using individual interest rates for the properties.
Important Factors Need to consider during Investing in Real estate
What are the things to look for in real estate? Many factors help you to make great investments in real estate. Some important factors that have to be considered to invest in the real estate market.
Location of the Property
The location of the property is the key consideration, and the most important factor to get profit in your investment. Amenities, green space, scenic views, and neighborhood atmosphere are prominent factors for residential property valuation. And area evolution, market, transport hubs, and others play an important role in commercial property valuation.
Investment Purpose and Investment Horizon
A lack of purpose to your investment may lead to financial distress, especially if the investment is mortgaged. Make sure your investment purpose is clear to you, it includes buy & self-use, buy & lease, or buy & sell (short-term or long-term).
Expected Cash Flow and Profit Opportunities
The money left after expenses refers to cash flow. Positive cash flow refers that the investment property is giving you a good rate of return. If you choose to give lease, the rental income gives you expected cash flow.
Bottom line in Investing in real estate
Real estate generally has a low correlation with other assets – like if sometimes the stock market may get low but real estate may often go up.
