Real estate investing for high returns is not an easy task, especially in an environment with very high uncertainty such as the one that is currently prevailing in most property markets around the globe. The deep crisis in the global financial system that has passed to the real economies of almost every country in the American and European continents, has thrown national and local real estate markets into a downward spiral, making very difficult any prediction in terms of how long and how much more prices will continue declining.
In thinking about high-return property investments in any environment (good or bad), it is important to have in mind that after everything will be accounted for, the performance of the property and the investment will boil down to two things. The income return and the appreciation return that the property will achieve over the holding period. The income return, which is typically measured as the ratio of net operating income (NOI) over the property value, reflects the income-earning capacity of the property in relation to the price paid by the investor. Thus, the income return of a property depends primarily on the rental income it can produce and the associated expenses for operating the property. It also depends on the acquisition price. Keeping the NOI of a property constant, a lower acquisition price implies a higher income return. The appreciation return reflects the increase in the value of the property (in percentage terms) over the holding period of the investment.
The identification of markets and properties that have solid prospects for offering high income returns and/or high appreciation returns over the planned holding period is literally the key to property investing for double-digit returns. Within this context, real estate investors need to become very well versed in understanding the specific economic circumstances, market synergies and dynamics that can create prospects for rising rental income and strong property value gains. Furthermore, due to the fixed location of real estate, the understanding of the spatial dimensions of property price and rent dynamics is also crucial in locating specific properties with prospects for strong rent and property value increases. The spatial dynamics of property prices suggest that certain locations within an urban area have higher chances to register strong property value gains than other locations, under certain circumstances.
Another important aspect of investing for double-digit returns is timing. Real estate markets are rarely balanced and go through cycles of declining and rising vacancy rates, rents and property values, due to imbalances between demand and supply. In better assessing the return prospects and the risk exposures of a property, investors need to understand the interaction between property income dynamics, and property value dynamics in the different phases of the real estate cycle. Given the dynamics of capitalization rate movements over the real estate cycle, property values tend to get a double hit when the property market is declining and a double boost when the property market is rising. Since property rent and price movements are the prime determinants of income and appreciation returns, entering at the appropriate stage of the real estate cycle is crucial in achieving double-digit returns.
In assessing the income and appreciation prospects of a property during economic downturns, such as the one that is currently under way, property investors are faced with the struggling dilemma of how far within their investment horizon they must project further rent and value declines. Overestimation of such declines may result in the loss of unique opportunities, whereas underestimation may result in bad investments and capital losses. The key to investing for double-digit returns in this environment is correctly assessing when the property market will be approaching its bottom. That is why property investors aiming for high returns need to monitor very closely the movements of the targeted market and continuously reassess its outlook by obtaining competent forecasts from real estate experts that are most successful and/or more knowledgeable in making such predictions.
Dr. Petros Sivitanides, the author of Real Estate Investing for Double-Digit Returns, has a Ph.D. from M.I.T. and over 17 years of experience in real estate investment consulting, research and forecasting. More on property investing for double-digit returns can be found here.
[tags]property investments,real estate investments,property investing,real estate investing,real estate[/tags]
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