Investment Property
How do you evaluate an income property?
By
Feb 18, 2006, 22:34

How do you evaluate a prospective income property?

Consider these factors:

1. The neighborhood in which it resides.
2. The income it generates.
3. The structure itself.

That should be the order of your investigation. Don't visit the property until you know the area and the building's cash flow. It's easy to fall into the trap of buying a building because you like its appearance rather than for its profitability. Don't overanalyze a prospect. Your projections probably won't be accurate anyway. You must nevertheless base your decision on something more than intuition. You need facts. 

Neighborhood Analysis

Every broker offers the same old chestnut: "The three most important factors in buying real estate are location, location, location." What's wrong with this? First, a property can be well located and still generate negative cash and a sales loss. Second, location is one factor among many that you must consider, not the least of which includes return on investment. Third, all real estate is well located. It's just a matter of timing. The ghost towns of the Old West were built for a purpose. Babylon wasn't erected without reason. Today's slum is tomorrow's Gold Coast. 

In the life of a building, the value of a location is as variable as the economy. Many old European cities have gone through great changes, including market collapses, physical destruction, and racial transitions. Yet individual neighborhoods within them have survived over the centuries. They have either been continuously maintained or have gone through cycles of decline and renovation. Fortunes have been made by those who have anticipated these changes and have acted accordingly. Location isn't the only consideration, or even the main consideration, but it is s consideration. Sizing up the community is as important as evaluating the prop erty itself.