Evaluating a Profitable income producing Property Yourself.
Real Estate is an imperfect market and this allows opportunities for the knowledgeable investor. There are three methods of evaluating any property purchase.
a) Replacement Value
This is comparing the costs of replacing the building with a similar structure at today’s prices. It is simple enough to obtain as all builders normally have a ‘per square metre’ building price plus add-on finishing prices such as carpets, curtains, landscaping, carports, painting etc. All that is required is to add the block value and you now have an idea of its worth. Often sleepers, that are under priced, can be found as invariably the market value will catch up with replacement value in time.
b) Market Valuation
This involves finding and comparing similar buildings to the one you are interested in and simply comparing the selling prices. Note that I stress ‘selling prices’ because the ‘asking price’ is often inflated. You need to check recent sales made of similar properties – local agents usually have a record of this activity. You can also compare prices in the classifieds, as well as checking on rents received. However, remember when comparisons are made through an agent’s records, they do not reveal the terms involved such as vendor’s finance, reduced interest rates etc.
c) Income Valuation
This method simply compares the rental currently received with the history of past increases. Once you have obtained this knowledge, you can figure out the capitalization rate of the area. Ensure that you have the total picture of the gross rentals and all expenses and outgoings that you will be liable for. Do not take the vendor’s figures as gospel, but have them investigated fully after getting them in writing. Income valuation is probably the most important of the three methods outlined, as it is critical to your cash flow. Nett operating income is the clearest indicator of a property’s worth.
The ‘Risk Factor’
The ‘risk factor’ is generally what we are all scared of. Often people work for their bosses and have no objections about risking their boss’s money thus making large profits for them.
It is also true of course, that if you weren’t earning profits for them, directly or indirectly, you would not be gainfully employed. If you are risking your own currency then there are some alternatives. You can invest in a syndicate with others and benefit from bravery in numbers. Or you could learn more about your chosen investment because with knowledge comes confidence. Put another way, most people are so busy trying to eke out a living that they have no time left for learning those techniques, which could make them financially independent.
You must understand that nobody other than yourself is as interested as you are in making yourself financially independent. Consider that your neighbors, family, boss and bankers are all guided by the fact that your present mode of lift suits them down to the ground. Also you should not seek advice on becoming wealthy from those who have not achieved it themselves, you stand an excellent chance of being shot down by sniping comments. They do not mean you any harm but they have surmised that happiness is ‘staying put’ and security is ‘just having a good job’.
Yet a job is only as secure as two weeks’ to a months’ notice or at most severance pay, because that is all you will get if the company you work for decides to retrench or simply goes out of business.
The question of boom or bust in real estate goes on, year after year. For as many people who say that things are about to go bust you will find a similar number, as well educated as the former, who will swear by boom times ahead. You, as an investor, should only need to be marginally aware that the market could go either way and still not be disastrous to you. There is no waterproof guarantee that there will not be a bust or short-term downturn; life is never that dull even if the odds are stacked well and truly against it happening.
It will come as a surprise that most of us could be millionaires and that the reason we are not is that it takes a lifetime to earn a million dollars from one’s wages. If we earn, say, $30,000 per annum over 35 years we would fall into this category – we would have finally made it!
There are two small problems however. The first is the length of time during which we spent the money in order to survive. The second is that one million dollars is not worth today what it used to be worth 35 years ago. Time is the single greatest factor between the ‘haves’ and the ‘have nots’.
Understand this point and you have grasped 90% of the wealth-building technique!
The only time that you have control of is NOW.
You should look towards making your profits now, not at some time in the vague future. Sure, planning ahead is important, but you have to act now to make your future success a reality. When you work for a living with no time to spare then time becomes your enemy as you become older.
When you invest profitably in the present then time turns into your friend and you grow wealthier by the minute. Now, the longer you hold onto your investment, the wealthier you will become.
Most Australians and Americans finish their working lives with no more to show for it than the house they live in, and sometimes not even that. If they are lucky, their 40 years of toil will yield them some superannuation to help eke out their pension, hardly surprising, because ever rising weekly expenses eat up wages as fast as they are earned. There are not enough hours in a day and years in a lifetime to get rich from wages.
Going into business has made some people rich, but is has also make many people poor. About four out of five new businesses in Australia end up folding.
Real Estate is the only investment that has stood the test of history, proving itself throughout the ages to be solid and reliable. Property prices vary over time. Only two or three years ago, it is hard to believe that prices were really that low, yet even then people were complaining how high they were. Property prices always go up in the long term, which is why property is such a winning investment.