REASON #2 - Control
A unique advantage to real estate is that you can control it, unlike other investments. In other types of investments, often you give your money to a financial advisor - they then place it for you in a company's stock, a bond, or a mutual fund. What happens after that is completely out of your control.
You now no longer have the ability to make operating decisions for the company you have invested in. For the most part, you are now at the mercy of its managers. Managers you hope make good decisions. If bad decisions are made, then they can virtually ruin your portfolio - just ask the people who invested in Enron.
With these types of investments (company stock, bonds, or mutual funds), the only control you have is choosing whether to buy or to sell.
With real estate, it's different. You purchase a tangible asset and then you have the ability to control the management of it. While it is true that there are still external market conditions that affect your investment, the difference is that you have the ability to manipulate the operations of your investment and to respond to these conditions. Instead of being reactive (buying or selling), you can now be proactive.
Let me give you an example, if you are a property owner, you have the ability to control rents based on market changes. This you do, in order to maximize your potential income. I do this all the time in my company - both with properties that I own and assets I control. Each month a manager should complete a market survey. A market survey is a simple study that involves doing some homework. This can be done by reviewing your competitors websites, and by calling them, to find out what they are charging for rents, deposits and what they are offering for concessions, if anything. By gathering this data, managers are able to make market decisions by comparing their rents, deposits, and concessions - against their competitors and then adjusting accordingly.
This doesn't always mean raising or lowering rents. Remember, the goal is to maximize income. Since that is a dynamic process, that might mean lowering rents or offering an incentive. This is when the property's occupancy comes into play. If you have the highest rental rates compared to your competitors, then most potential residents will go down the road and rent from your competition. This then becomes lost potential income. The dynamics of real estate require you to keep occupancy, as well as rents, high. If lowering rents by $15.00 per month is the difference between being 95 percent occupied or being 88 percent occupied, then by all means lower your rents! Consider the following example.
$685.00 per month - 95% occupancy = $65,075.00 Rental Income
$700.00 per month - 88% occupancy = $61,600.00 Rental Income
In this example, just by lowering your rent by $15.00 per month on average, you actually gain close to $3,500.00 per month in income - that's nearly $42,000.00 per year. Lowering rents gradually can lead to higher occupancy. Based on a 6 percent capitalization rate, that is $700,000.00 ($42,000 / 6 percent) in value, all because you were on top of the market and able to make a real time proactive decision.
You have the power in real estate to control the operational performance of your asset more than any other investment. This is where investing in real estate gives you control. The capitalization rate is the net operating income divided by the purchase price, and is determined by evaluating recent sales statistics of similar properties in a given market. Your broker will be a valuable tool in determining your market's capitalization rate.
JUST REMEMBER: Capitalization Rate = Net operating Income (divided by) Purchase Price
A unique advantage to real estate is that you can control it, unlike other investments. In other types of investments, often you give your money to a financial advisor - they then place it for you in a company's stock, a bond, or a mutual fund. What happens after that is completely out of your control.
You now no longer have the ability to make operating decisions for the company you have invested in. For the most part, you are now at the mercy of its managers. Managers you hope make good decisions. If bad decisions are made, then they can virtually ruin your portfolio - just ask the people who invested in Enron.
With these types of investments (company stock, bonds, or mutual funds), the only control you have is choosing whether to buy or to sell.
With real estate, it's different. You purchase a tangible asset and then you have the ability to control the management of it. While it is true that there are still external market conditions that affect your investment, the difference is that you have the ability to manipulate the operations of your investment and to respond to these conditions. Instead of being reactive (buying or selling), you can now be proactive.
Let me give you an example, if you are a property owner, you have the ability to control rents based on market changes. This you do, in order to maximize your potential income. I do this all the time in my company - both with properties that I own and assets I control. Each month a manager should complete a market survey. A market survey is a simple study that involves doing some homework. This can be done by reviewing your competitors websites, and by calling them, to find out what they are charging for rents, deposits and what they are offering for concessions, if anything. By gathering this data, managers are able to make market decisions by comparing their rents, deposits, and concessions - against their competitors and then adjusting accordingly.
This doesn't always mean raising or lowering rents. Remember, the goal is to maximize income. Since that is a dynamic process, that might mean lowering rents or offering an incentive. This is when the property's occupancy comes into play. If you have the highest rental rates compared to your competitors, then most potential residents will go down the road and rent from your competition. This then becomes lost potential income. The dynamics of real estate require you to keep occupancy, as well as rents, high. If lowering rents by $15.00 per month is the difference between being 95 percent occupied or being 88 percent occupied, then by all means lower your rents! Consider the following example.
$685.00 per month - 95% occupancy = $65,075.00 Rental Income
$700.00 per month - 88% occupancy = $61,600.00 Rental Income
In this example, just by lowering your rent by $15.00 per month on average, you actually gain close to $3,500.00 per month in income - that's nearly $42,000.00 per year. Lowering rents gradually can lead to higher occupancy. Based on a 6 percent capitalization rate, that is $700,000.00 ($42,000 / 6 percent) in value, all because you were on top of the market and able to make a real time proactive decision.
You have the power in real estate to control the operational performance of your asset more than any other investment. This is where investing in real estate gives you control. The capitalization rate is the net operating income divided by the purchase price, and is determined by evaluating recent sales statistics of similar properties in a given market. Your broker will be a valuable tool in determining your market's capitalization rate.
JUST REMEMBER: Capitalization Rate = Net operating Income (divided by) Purchase Price
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