Price Is Not The Most Critical Factor When Buying Income Property

Sure, price is important if your resources demand that you invest in properties within a certain price range - that's elementary.  But when it comes to analyzing the investment potential of a property, price plays second fiddle to the most critical factor - return on investment (ROI).  It's not that price isn't important.  In fact, price is a component of ROI - price is the "I" in the equation.  But let's look at the top three features of a property that contribute to ROI.  These are demand, acquisition cost, and management.

1)  Demand.  Demand for a property is based on location and features.  Features can be changed with remodeling or replacement, but location is fixed for eternity.  OK, the value of the location may adjust over time based upon neighborhood influences, government activity, etc., but regardless, we have to look at location based on today's conditions and what we can estimate the value of the location to be in the future.  To think of demand in other terms, we could also call it value in the eyes of the customer (either a tenant or buyer at re-sale).

2)  Acquisition Cost.  It is often said that real estate investors make their profit when they buy, not when they sell.  I agree with this statement, as do many well-known real estate gurus such as Donald Trump.  The costs of financing, escrow fees, insurance premiums, assumed debt, and the amount of the down payment - along with possible upgrade and remodeling costs - constitute a substantial portion of our investment ("I").  Some of these costs are immediate, one-time expenses and some are recurring, long term expenses that chip away at our ROI if not properly budgeted in our pre-acquisition business plan.  How well we structure our purchase terms can be just as important in the long run as the price.

2)  Management.  Many investment properties that have strong demand and were purchased with excellent terms fail to provide a proper ROI because they are poorly managed.  Management provides the "R" in ROI by executing the business strategies that were assumed when the investor made the purchase.  Proper marketing of the property, maintenance, tenant relations, and cost controls are all part of ensuring profitability - thus achieving ROI goals.  It's for this reason that many successful investors hire professional property managers.

When making a real estate investment, be sure to consider demand, acquistion costs, and management - the total ROI - not just price.

Happy investing!