Investing in real estate: net income and property types
Last week we touched on the advantage behind knowing the difference between commercial and residential real estate. Where we landed was determining the value andanticipating what a lender or investor is looking for in a property, but that’s just one side (albeit a significant one) of a complex consideration. Rightfully so, unlike real a property acquired for a single family home, investment properties are leveraged to generate revenue and must therefore operate in ways beyond single-family occupancy.
In many areas (look at Toronto, Vancouver, and even China to name a few) the real estate market is moving rapidly and properties are exchanging hands where once they were not. Office space and housing alike - with real estate showing up in the news and everyday dialogue, many are considering the pros and cons of becoming an investor. The difference between an amateur and a professional investor is as much education as it is experience, so read on.
As with anything that involves a significant sum of money, real estate investment is a slow and multifaceted process. Whether you’re a sole investor or looking for a partner, any significant expenditure must be backed by assurances that go way further than ‘a gut feeling’. An experienced investor will have an equation in place to confirm hopes or provide a foundation for concerns. Understanding the components of that equation is vitally important to being successful in real estate.
Before you posture at the starting line, there’s some warmup to do, so to speak. Identifying the goals of an investment (your own, or a partner) is mission critical when it comes to strategically qualifying a property. Whether the goal is longevity and the promise of consistent returns through income, or a quick and lucrative flip, you’ll need to know the lay of the land.
The short and the long game: which property type is best for each?
Just about any property type can be counted on to supply consistent income through renting, but some are more suitable for flipping than others. Residential property is not only the the ideal starting point for early investors, they’re also easier to flip and see a lot more attention from varying types of investors. For this reason, residential property is ideal for both quick profit or rental opportunities.
Dealing with individuals as opposed to businesses makes the process that much more appealing in this category. To summarize, look to residential real estate as the ideal opportunity to flip, and a viable, albeit less lucrative alternative to renting on a commercial scale.
On the other hand there’s commercial property. Driven by complex occupancy and renting models that cater to both business and individuals, higher costs in getting started tend to ward off novice investors. That significant barrier-to-entry isn’t without its rewards, however, as commercial real estate will also yield a higher return than a residential counterpart, if an investor is prepared to work the system and account for costs that include staff, tax consequences, market trends, and more.
Back to the value equation
Armed with a sense of which real estate type is ideal for any given venture, one can start to look at the equation that separates a worthwhile property investment from a questionable one. Largely, that comes from calculating the income you can expect to see, but that’s often easier said than done. The cost to buy and renovate, what you your mortgage payments will look like, and how to offset these and more with the income you expect to see is the name of the game, and where you’ll land is called the net operating income. Without it, the investment simply isn’t worth your time.
Take your time with these considerations - the real estate industry may move quickly, but that doesn’t mean you need to. Any miscalculations along the way could carry long-termadverse effects and be costly. Take a look at what you expect to invest, renovation realities and vacancy statistics (and in the case of commercial, operating costs) and weigh them against your gross operating income to get a sense of net operating income. You can offset risk by taking consultations with trusted professionals, and by having specialists provide estimates, but at the end of the day knowing what defines your net operating income is the best way to identify opportunities, and pitfalls.