With the volumes of material written on real estate investment, rental properties, making the right buy, and selling for profit, it is easy to become a “numbers” investor. And, there are many very successful real estate investors out there who concentrate very much on the numbers of the deal.
· Gross Rent Multiplier
· Capitalization Rate
· First Year ROI
· Subsequent Years ROI
· Rental Yield
· And there are more
Those and the many other calculations used by investors to value and evaluate properties are very effective and necessary. If the numbers don’t work, the deal won’t, and losing money isn’t the goal of any investor. We must do our “due diligence” concerning the area, prevailing prices, trends in real estate, population demographics and supply/demand related to rental properties.
However, once we’ve “run the numbers” and determined that a property is a viable candidate for purchase, we should take a “Qualitative” approach to complete our decision-making process. The word qualitative could apply to the condition of the property, and the overall way that it will be presented in the marketplace. But that’s not what we’re talking about here.
How does the property stack up with your desires for quality of life, your management style, your long term investment goals and the ultimate disposition of the property in your retirement or life plan? Just because the numbers add up, you shouldn’t be convinced that this is a viable investment for your plan.
One aspect of the numbers, return on investment, can be calculated and evaluated on a time line. A property may only be a great investment if the holding and rental income period is out ten years. If we’re at a point in our lives where we may be retiring or making a major life-change in five years, this property may not be for us. Liquidating it prematurely can take all of the positive return out of our pockets.
What about your tolerance for risk? The valuation numbers for real estate investment can be run in a number of ways, with the variable of “leverage” in play. The more leverage, the more risk in many cases. Or, perhaps you’re leveraging in order to free up cash to multiply your properties. If you don’t sleep well at night, high leveraged returns may not be as valuable to you as you thought.
The next time you begin the process toward the purchase of an investment property, use a two-fold plan of Quantitative and Qualitative analysis to make sure that you’ll be happy with your decision down the road.