New legislation and the emergence of technologies are giving everyone an opportunity at building a real estate empire. Education is the keys to taking that first step and whether you’re a real estate tycoon or looking to get started in real estate investing Equifund has you covered. Knowledge is the mortar of wealth creation, and with that in mind we’ve prepared for you the 6 MUST KNOWS of real estate investing.
1. Tenant Covenant
When reviewing a real estate investing opportunity, have a good understanding of the tenants and the nature of their business. Learn about the industry they are in and the overall health of that industry. Determine if they have multiple locations across the city, country or globe. Typically, tenants with multiple locations usually have a good covenant and are secure in their business dealings.
Through the use of rent rolls, get a good understanding of the tenants that are either late in paying rent or chronically late. Tenants that are having difficulty paying rent may have a cash flow problem which could result in default of the lease. Your tenants cash flow problem is your problem.
3. Rents and Markets
Have a general understanding of what the market rents are as well as vacancy rates for investments similar to the one you are considering. Access the net market rent paid by the tenants. If they are below market, consider the term remaining in their leases and estimate what they should be paying and more importantly if they are able to pay. Categorize the investment as being either better or worse than market. If it is better, then you should anticipate that your revenues will go down as the market reaches equilibrium. Tenants will inevitably move to more affordable accommodations if the opportunity presents itself. Which means, anticipate that they may move from your building to another if your rents are higher than comparable properties. If the investment is performing below market, determine how it can achieve market norms through rent increases or operating cost reductions.
4. Operating Costs
Operating costs are a factor of what it takes to operate the building. In many cases where rent is charged as a net rent, the tenants are responsible for paying their proportionate share of operating costs. Be sure the operating costs are at or below market so that they are not punitive in a tenant’s ability to pay them.
5. Recapitalization Costs
The cost to repair base building items, i.e., roof, windows, common area elements, and HVAC repairs, are paid out of the net operating income of the building. That means, they are not recoverable from the tenants and therefore come out of the profits of the real estate investment. Be sure you have a good understanding of the short and long-term recapitalization costs as they will affect your anticipated profits and should be factored into the market value of the building.
6. Microeconomic Conditions
What is happening in the economy that might affect the financial performance of your investment. If you have a building that is occupied by government departments you would want to know the overall objectives of that government. For example, if a new government is planning cutbacks, you might anticipate that they will not renew leases. If one of your tenants belongs to a booming industry they might not renew because they will require larger accommodations.
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