Building wealth through real estate investment can be an exciting proposition - not only as a means to achieve high returns, but also as the method by which to diversify and hedge your portfolios’ performance. But, how do you know what to look for in a real estate investment opportunity? What separates a wise investment from a poor one?
At Watermark, we have realized that each unique real estate investment opportunity requires meticulous analysis and thoughtful consideration. Here are four fundamentals that Watermark recommends for each real estate investor:
The Numbers Don’t Lie
It is easy to get swept away by the glitz and glamour of a potential investment opportunity, at Watermark we call this the “shiny object syndrome," however, there is no substitute for due diligence. As Warren Buffet once famously stated, “investing is an easy game if you can control your emotions.” In any investment, especially real estate, it is crucial that investors make decisions based on market research that objectively assesses costs, market conditions, and returns on investment. For instance,
- Cash on Cash Return
How much return will your initial cash investment give you annually? Cash on cash return is simply the ratio of annual cash flow from a real estate investment to the total amount of cash invested. For example, if you invested $100,000 into a property that produced $10,000 of income, the cash on cash return would be 10%.
- Cap Rate
Another measure of return on investment, a cap rate is the ratio of a property’s net operating income to its market value. For example, a property that is worth $1,000,000 and produces $100,000 of net operating income annually, would have a cap rate of 10%. This metric is especially useful in comparing a property’s income producing capabilities relative to others in the same price range.
- Internal Rate of Return (IRR)
An extremely useful way to measure the performance of a real estate investment, an IRR takes into account the time value of money as well as cash flow during the life of the investment.
For any real estate investment to succeed, there must be market demand for that particular product. Building or buying in an area where potential customers do not exist is a recipe for certain disaster. Being a savvy investor requires knowing the market location in which you want to invest. At Watermark, here are a few questions we like to consider:
- Is there population growth in the area?
- Is there job growth?
- Are there attractive schools in the area?
- How have real estate prices fluctuated in the past? What trends are forecasted for the future?
- Are there shifting demographics? How will that affect housing demand?
The simple reality is that everybody is looking for a place to live. It pays to analyze local market trends in order to help you better understand the value and income potential of a property.
We all want the best. Whether it is with technology, clothes, cars, food or drink – quality matters. Real estate is no different. First, investing in high value, quality real estate provides investors a long-term competitive edge. High quality buildings generally require lower maintenance costs, will rent quicker than their counterparts and will maintain their desirability over longer periods of time. A few questions we might ask ourselves when considering developments:
- How will this development stand out from similar ones? What makes it distinct?
- Will this product command higher than average rents?
- Can we build this with top notch quality and craftsmanship, while being on time and under budget?
Know Your End Game
No two real estate investments are created equal. While differences in real estate investment opportunities are seemingly endless, the clearest differences between investments can be investor exit strategy. These range from a buy and hold rental property that produces cash flow, to a value add property that you buy, add value, and then sell at a higher price, to developments that are built and then sold quickly thereafter. There isn’t one right or a wrong answer when it comes to your end game, but it is essential when considering a real estate investment that you have a clear understanding of your end game goals. 1) Precise goals, 2) plans of action and 3) disciplined due diligence are the essential ingredients for realizing consistent yields.
The Watermark Difference
Choosing investments that are rooted in sound fundamentals lowers your risk and increases the likelihood of achieving your expected yield. Watermark Equity Group specializes in taking the guessing game out of real estate investing. Leveraging our expertise and attention to detail, each Watermark investment is based on careful analysis of market conditions so we can provide our investors with the best opportunity to build their wealth through real estate.
To learn more, reach out to Watermark Equity Group today!
Mike is the Finance Director of Watermark Equity Group. Since graduating Wheaton College (IL) with degrees in Business and Economics, Mike was active in community development and was a professor of business studies before joining Watermark in 2017.