How to Separate the Good from the Bad!
We work very hard to earn our money, but how many of us work very hard to find better ways to spend it? To many people real estate is the safest place to keep their money. The real estate options range from commercial to residential. While in developed world the mixed use properties are trendy, in economies like Uganda many prefer residential and mostly apartments. Before you buy that rental property, there are four considerations which can help you make the best choice. These following four factors can help you evaluate an investment:
- Evaluate the Location of the Property
Location is one of the most important things to consider when evaluating a potential investment property. It can help you make an educated guess about the property’s potential to appreciate over the years.
For example, a property near a good school is a good buy there is always an ample supply of tenants, the students’ parents will usually pay the rent and you can often charge a higher rent because of the desirability of the area and increased demand for apartments.
What Is the Neighborhood Like?
- Is it suburban or urban?
- Is it close to retail shops, transportation hubs, hospitals, and schools?
- What type of tenant will want to live there? (Families, seniors, single people, middle class, etc.)
- Is there an ample supply of tenants in the area?
- Is it close to your current residence?
-If it is far away, you will have to factor in travel costs in terms of financial costs from commuting and opportunity costs from lost productivity.
- Is the neighborhood stable, expanding or in decline?
-Are there a lot of vacant properties or is there a lot of new construction?
- Do you see an opportunity for growth in the future?
-For example, a new railroad line that connects to a major city is being built, or a new company is relocating to the area and creating new jobs. These can dramatically increase the desirability of the location.
- Evaluate the Property’s Financials
Know Your Budget.
It is always difficult to buy beyond what you can afford. Some people prefer to borrow. Yes, but that other people’s money. They will need it back at a cost. Here are afew questions to ponder on;
- How much can you put into this investment?
- How much can you afford to lose?
- If you need additional funds, where will you get them from?
- What will your monthly mortgage payment and interest rate be?
Look at the Value of the Property
- Ask to see the actual income and expense sheets for the property. If none are available, make sure you are able to reasonably predict the operating costs.
- Calculate the Net Operating Income (NOI) for the property.
-What is the standard vacancy rate for your area?
-What is the projected rent for the property?
-What would insurance cost be?
-How much are taxes? These are compulsory these days.
-What will property maintenance cost?
- Have you determined your market’s Capitalization Rate (Cap Rate)? If you are unaware of your market’s Cap Rate, you should consult with a professional real estate manager and Pentagon Management Services Ltd will professionally advise you..
Once you have determined the Cap Rate, you can now divide the NOI by the Cap Rate and get the current value of the property.
- Have you done a Comparative Market Analysis (CMA)?
What are comparable homes in the area selling for? Whether you are buying a rental property or looking to flip a house, you will want to make sure you are not over-paying for the property.
- Evaluate What Repairs Are Necessary
What Repairs are you Comfortable With?
Do you want a property that just needs a coat of paint and new carpet, are you OK with a moderate amount of work or are you comfortable with a gut rehab (new plumbing, electric, floors, walls, etc.)
Can You Afford to Make These Repairs?
- The cost of repairs will vary greatly depending on if you are able to do it yourself or if you need to hire someone else to do it.
- Your construction budget for materials and craftsmanship will also vary widely depending on whether you are renovating a million dollar home or a fifty thousand dollar rental property.
- Another general rule of thumb is, repairs will always cost more than you have planned for. If you hire a contractor, a two-week job often turns into four weeks. Even if you are doing the repairs yourself, costs can get out of hand.
For example: You plan to put up new dry wall in a room for $800. When you open the walls, you find an infestation of termites and the need not only to exterminate but to also re-frame the walls. Unexpected expenses like these will add up quickly. You will not only be hit with a higher construction budget, but you will be paying additional financing costs, called “soft costs,” to pay the mortgage, property taxes, and insurance on the vacant property while these additional repairs are completed.
Evaluate the Investment Compared to the Current Market
You need to look at what is trending in the real estate market now and adjust your plan accordingly.
Consider highly desirable Assets. Highly desirable assets are those that can be easily bought and sold regardless of the market. They are always in demand. Think of them as necessities, like bread and water.
People don’t need a house with an in ground pool and TV screening room. People do need a house with a clean bathroom and a strong roof. You want your property to appeal to the greatest amount of people so you have the greatest number of prospective tenants and buyers.
You can now make a buy and we shall manage to “GROW YOUR WEALTH”.
For comments Contact
Athanasius Buyondo Mbona
Chief Executive Officer,