What to Watch Out For When Buying Real Estate Property
Owning real estate property is a decision that should be weighed very carefully. Whether you're an established company or a private investor, it could be one of the best investments you can make. There is no tried-and-true strategy to buying real estate property. However, there are a few guidelines that any business or investor can use to get started. Before you begin your search, be clear about your objectives and know precisely what you want.
Questions We Like to Ask Before Purchasing Real Estate Property
- What kind of real estate property are you looking for?
- Is the real estate property for your own business? To rent out? To build equity?
- What area would be ideal?
- What's your risk tolerance? How much are you willing to put into it?
- What skills can you bring? What skills do you need to hire or contract out?
- What kind of location do you need?
- Do you need to buy or lease?
- What is your appropriate balance regarding financing and your ability to make a down payment?
- How much time can you commit to the real estate property?
- How much work are you willing to put into the real estate property?
- What kind of real estate property or facility management will you need?
- Are you willing to be a landlord?
- Are you indeed ready to make an investment purchase of this size?
Know Your Real Estate Property Vocabulary
If this will be your first real estate property investment, make sure you walk into this investment understanding what the vocabulary and acronyms mean. Knowing these terms will make the process easier for you while you're working with people in the industry.
Loan-To-Value (LTV): The loan-to-value (LTV) ratio is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage. Typically, estimates with high LTV ratios are higher risk and, therefore, if the mortgage is approved, the loan costs the borrower more.
Debt Service Coverage Ratio (DSC): In corporate finance, the debt-service coverage ratio (DSCR) is a measurement of the cash flow available to pay current debt obligations. The rate states net operating income as a multiple of debt obligations due within one year, including interest, principal, sinking-fund, and lease payments.
Capitalization Rate (Cap Rate): The capitalization rate (also known as cap rate) is used in the world of commercial real estate property to indicate the rate of return that is expected to be generated on a real estate investment property. This measure is computed based on the net operating income, which the real estate property is expected to create and is calculated by dividing net operating income by property asset value and is expressed as a percentage. It is used to estimate the investor's potential return on their investment in the real estate market.
Cash on Cash: A cash-on-cash return is a rate of return often used in real estate transactions that calculates the cash income earned on the money invested in a real estate property. Cash-on-cash performance measures the annual return the investor made on the real estate property with the amount of mortgage paid during the same year. It is one of the most critical real estate ROI calculations.
Vacancy Rate: The vacancy rate is the percentage of all available units or space in a rental property, such as an office building or apartment complex that is vacant or unoccupied at a particular time.
Usable Square Feet: Usable square feet includes the specific area the tenant will physically occupy to conduct business.
Rentable Square Feet: The usable square feet of the office space plus a pro-rata share of building common areas (corridors, meeting spaces, common restrooms, lobbies, etc.). A tenant will pay for these standard areas in proportion to the amount of space they lease in the building.
Ad Valorem: An ad valorem tax is a tax based on the assessed value of an item, such as real estate property or personal property. The most common ad valorem taxes are property taxes levied on real estate.
Visit and Consider Several Real Estate Properties
Before you make a decision about which real estate property to invest in, consider touring many different features. A good rule of thumb would be to make a list of the most important things you want in the real estate property (price, location, condition, allowed uses) before you begin touring.
Location is something you need to consider. Real estate property located near universities, hospitals, or downtown will generally cost more and will sell quickly. Your unique needs also are discussed, as well as your clients. Above all, the real estate property you choose should fit your price, your preferred location, and what you will be using it for.
More Questions You Should Consider When Deciding To Purchase Real Estate Property
- What will be the market demand for this type of space in this area?
- What is the real estate property currently used for?
- What can the real estate property be used for?
- What kind of income does the real estate property currently generate?
- What kinds of fees come with real estate property (principal, interest, tax, and insurance)?
- Will anything need to be replaced soon-capital outlays such as tenant improvements and HVAC systems?
- Why is the owner selling?
- How is the real estate property in the surrounding area doing?
What You Need To Do Before You Say Yes To Purchasing Real Estate Property
Once you find a real estate property you want to purchase, there are a few things you need to research before you say yes.
Find Out the Fair Market Value of the Real Estate Property.
Fair Market Value (FMV) is the price the property should sell for on the open market. The fair market value represents the price of the real estate property under the following usual set of conditions: prospective buyers and sellers are reasonably knowledgeable about the asset, behaving in their own best interests, and free of undue pressure to trade and given a reasonable time for completing the transaction. Given these conditions, an asset's fair market value should represent an accurate valuation or assessment of its worth.
Have the Real Estate Property Inspected.
If you are not a seasoned real estate property investor, you may not understand the necessity of enlisting a certified real estate property inspector to inspect the property and underlying ground to ensure that your potential purchase is as described and that the properties facilities are in working order. You do not want any unforeseen problems after you sign on the dotted line. A certified real estate property inspector will make sure the structure is sound, that you have adequate parking space, the electrical wiring is up-to-date, and if the HVAC system costs will affect your bottom line. An environmental report will research the potential for any pollutants that may need to be mitigated for public health reasons.
Study Real Estate Property Deeds and Titles.
Running a real estate property title search will clear any doubts you may have if the property is tied up with liens, mortgages, misattributed seller ownership, tax debt, or any other complications. If a real estate property you're interested in purchasing has any of these issues, it could decrease the value of the property and put limitations on how it can be used. Knowing the history of the real estate property will give you peace of mind when ownership is transferred to you.
Have The Real Estate Property Appraised.
The importance of enlisting the services of a certified real estate property appraiser cannot be stated enough. When you decide to undertake the expensive investment of purchasing real estate property, hiring the right appraiser will help to confirm or question your underlying financial assumptions, prior to closing on the property.
By asking all the right questions listed above, and leaning on the advice of real estate property experts, you will ascertain whether or not the real estate property you want to invest in is secure, profitable, and the right decision for your business.