Real estate experts use different financial tools to make good investment decisions. One of the things they usually check, is the “cap rates” or the annual ROI (Return on Investment). On the other hand, people who are just looking for a single-family home or other residential property, usually rely on gut feeling or emotion to make a purchase; although most of them base their decisions depending on their needs. These factors may include job relocation, education opportunities for children, and many more.
Related: Essential Home buying Tips
It’s a different story for those who are just getting started with real estate business. It’s not just about finding a well-constructed property. It’s about making your investments worth it by making sure the value of the property may increase.
One of the things you need to do is find a good property with a good location. This means it should be accessible to different public utilities such as hospitals, schools, malls, restaurants, and others. You should also take a look at the environment. Of course, the better the community is, the higher the value can get. Another thing is the cost of living for every suburb. This may also affect the price value of the property. In fact, there could be a big price difference between the same exact units when you’re talking about two different locations.
The best solution for this is to estimate the annual income you can generate before the purchase. Try to compute the minimum coverage of your monthly mortgage amount with initial income from renting out the property. This will help you make a forecast on how much you can earn profits.
How to compute the income and the cap rate?
- Identify the annual rent you can expect from a residential property.
- Estimate your annual expense of owning the property
- Compute the annual income
- Compute the annual net income
- Compute the property’s capitalisation rate, or cap rate
Consult a licensed real estate agent
To make sure you are making the right investments, specifically houses for sale, it is best to consult a licensed real estate agent. They can even help you find the best property investment. If you’re considering acquiring a commercial real estate in Melbourne or buying a business for sale, look for reputable business brokers in Victoria. In other words, look for an estate agent with experience and knowledge in your local market.