How much return do you expect to earn each year as a real estate investor? How do you calculate your return? How much is a particular property worth? These seemingly basic questions can actually be complex, and not as easy to answer as you might think.
Many investors, when asked these questions, will admit that they haven't thought about it, or that they simply don't know. Yet, you should be interested in knowing how to judge your own investment results and how to judge the overall market.
Otherwise, how can you determine whether you are succeeding?
Valuation of real estate, not being determined in an auction marketplace like the stock market, is also not valued by any authoritative source. It is true that appraisers decide market value, but that is a reactive science. Thai is to say, an appraiser
will tell a lender whether a home's appraised value is close enough to the offered price to
justify lending money. If the lender wants to make the loan, there is every reason to believe that the appraisal will support that decision most of the time. Real estate values are driven by the market, as they should be. Buyers and sellers ( establish value, not bankers, brokers, and appraisers. While the players (buyers, sellers, lenders, etc.) depend on appraised value, remember that it is the buyer and
seller who ultimately dictate what the market price should be. An investor who is familiar with the area will
know immediately whether an asked price is high or low, meaning the experienced investor knows when to make a lower offer or when to grab a bargain. This knowledge grows from awareness of relative values in the area and in the region, the current supply and demand level, the availability of financing, condition of the property (including the degree of visible deferred maintenance), age of the property, and many, many other factors, both tangible and intuitive. In other words investors are able to spot value and it does not take much practice to acquire the ability to arrive at a reasonable ballpark estimate of a property's potential value.
Pricing is not set in isolation, or with any single factor in mind. It is interesting that people who have never owned real estate tend to think that prices are set by sellers, often without just cause, and that's what you have to pay if you want the house. But more experienced investors and homeowners know that price is the result of a complex series of supply and demand features. Prices depend on much more than the property-related or market-related features. The real elements of price include determination of value, which is difficult to define. Value includes:
- Potential rental value.
- Current supply and demand levels.
- Building activity
- Employment level.
- Crime levels and trends.
- Construction quality.
- Weather.
- Convenience.
- Popularity of the area.
- Perception of likely future value.
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