If you ever get a chance to read my posts on the BiggerPockets forums, you…
Browsing: Real estate pricing
Many investors have a favorite strategy for weeding through the numerous income properties on the market in their search of a solid investment. Some use the “price-per-door” as a benchmark. Others consider the “gross rent multiplier (GRM)”. Yet others are convinced that capitalization (cap) rates are the way to go.
Which evaluation tool is best?
Investors have asked me the above question numerous times. A more profound question would be, “Is there really a BEST way? Let alone a right or wrong way?” Let’s explore some of the common comparison strategies.
This technique is extremely easy to apply. Simply take the building price and divide by the number of total square footage of improvements. Thus, a 12,000 square-foot property with a list price of $1 million has a price-per-square foot of $83.33/sq. ft. This can be a useful tool when comparing different properties in a demographic area. It is not, however, without its limitations. For example, this method does not take income or expenses into account. Evaluating a property exclusively with this method and you could find yourself money pit and you wouldn’t even know it.
For the past several years it seems that every time you ran into a real estate agent he would proclaim that the market was at the bottom and it was time to buy. Of course, that was nothing more than the agent’s vested interest speaking. The market continued to slide in just about every city. Some fared worse than others, but few areas of the country were spared.
Many inexperienced and even some veteran investors have an expectation that the real estate market can turn on a dime in the manner of a speedboat. Perhaps they think it’s more like the stock market, which can swing wildly from one trading session to the next. However, real estate is more like a supertanker in that it takes a long time to change course. The reason for that is simply the lack of instant liquidity and the time it takes to complete each transaction.
There is good news. The latest report from the Case-Shiller U.S National Home price Index shows that real estate prices have shown their first quarterly increase in three years. Does that mean that the bear market in real estate prices is over? Not by a long shot. There are many foreclosures on the horizon and the national economy is still hurting. However, it’s a start.
The great real estate boom reached its apex in 2006—and then the bubble burst. More specifically, the single family home bubble burst. Now, for the first time in years, condos and townhomes are suddenly affordable for a lot of people in places like California, Arizona and Florida. Combine this with Obama’s tax incentives and you’re looking at a buyer’s market. While this is great for able and willing prospective homeowners, it could prove to be a trap for real estate investors.
“I’m buying homes for 50 cents on the dollar!”
The question on most investors’ minds is “has the market reached the bottom?” The definitive answer is that nobody knows. On the BiggerPockets.com bulletin, Joshua Dorkin posted a link that addresses this very issue. In the article, the author argues that there will not be a quick recovery to home prices. That may or may not be a true statement (although I’d bet he’s right), but home prices are definitely selling at prices half of what they were three years ago.
And therein lies the trap
Some real estate investors like to think that they are purchasing single family residences at steep discounts—“50 cents on the dollar!” But this begs the question: to what dollar are they referring?
The most important thing for beginner real estate investors is to find great deals. Not good ones, but great ones. Here are some steps that will help investors find those great cash flow deals.
8 Steps to Finding Great Cash Flow Deals
Note: Finding great deals takes time and patience. Often times, new investors get impatient and jump into the first property that gets them excited. Keeping emotion out of the equation and being methodical is key when buying rental properties.
Image by Getty Images via DaylifeI would imagine anyone calling him/herself a real estate investor…
So, is it good or bad news that home prices have –as Bloomberg.com puts it–“dropped…