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5 Smart Real Estate Investing Tips

By Elizabeth R. Elstien

The key to a smart real estate investment is knowing how to purchase a property that will be the most profitable for your money. An investment property is similar to running a business, as you must know the market, neighborhood, and profit and loss. There are many factors to consider before buying a property. Follow along to learn five tips for smart real estate investing.

1. Understand Capitalization Rate

Before you even think about investing in real estate, it is important that you understand what a capitalization cap rate is and how it factors into the real estate investment purchase. A cap rate is a ratio of the annual net income to purchase price. The lower the operating costs, the higher the cap rate, so a high cap rate is preferable. Look for current average multifamily cap rate of 4% in New York City, but averages change with the real estate market.

2. Type of Property

Know the type of property you are interested in purchasing for the money you have to invest. For example, do you want a multifamily building, a storage facility or an office building? Look at the pros and cons of each. A storage facility is a low-cost investment while a multifamily building has higher maintenance costs.

3. Fix Up or New

A property that needs a lot of repairs may be purchased at lower price than a new property. A loan may be needed to do necessary repairs and upgrades. If so, be certain before purchasing that you are eligible for a loan or your purchase is for naught. Get repair/upgrade estimates for an older property to decide if the construction expense will bring in higher income to justify the purchase of a fix-up building.

4. Research The Area

Do your research and learn the market in the area you wish to purchase in. Then, you'll know if the purchase is projected to show profits. Is a new micro-apartment complex slated for a certain neighborhood? Purchasing a storage unit in or near that neighborhood may be profitable in the long run. Does an area always have a shortage of housing? Consider buying a multifamily building with the pretext that it will have a low-to-no vacancy rate.

5. Management Decision

No matter what type of investment property you wish to purchase, someone has to run it. Investment property equates to running a business. Decide if you will hire a manager to run the property or run it yourself. Hiring a professional to manage the business property comes at an additional cost and will lower the cap rate.

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