How to Evaluate Real Estate Property for Investment

Evaluating a real estate property can be a really tough task for the uninitiated. Knowledge of the markets and specific education and training in the field of Land Valuation and Management is needed in order to arrive at a correct value for a property. Real estate appraisers take into account recent sale prices within the area as well as community conditions to make a good appraisal of a property. Interested buyers and investors also need to understand that an appraisal is different from a formal valuation. While an appraisal is just an educated estimate of a property’s value, a formal valuation is a legally binding value, and can only be undertaken by a qualified valuations officer who has undertaken the necessary training and education, and who has been licensed by the state to issue formal valuations. While appraisals are only intended as a guide, valuations can be used as a legal price base for a property. Formal valuations take into account: property location, building structure and condition upon survey, encumbrances on the property, features, and zoning laws.

Taking this knowledge into context, one must also be aware that evaluating real estate property for investment is not only about finding out the value of a property but also about finding out the value of a property when cash flow is considered. In real estate, cash flow is the amount of money going in and out of a property. A positive cash flow means the property is earning, while a negative cash flow means the property is losing money. Taken into account in cash flow calculations are: rental yield of the property, monthly mortgage, and operating expenses (repairs, maintenance, improvements etc).

Investors must also understand that here in Australia, negatively geared properties earn tax incentives which makes it possible to buy properties that have negative cash flow yet earn passive income simply by claiming said tax incentives. As long as the capital gains exceed the projected losses of property over the period of speculation, negative gearing can be profitable for the speculator.

Once a proper understanding of property value is reached by the prospective investor, he or she must then answer the question of why they want to go into property investment and what type of property investment they would like to engage in. Some property investors engage in wholesale real estate investing while some fix and sell properties. Others rent out or lease their properties while holding it while some wait for the proper time before flipping their properties. Whatever mode ofproperty investing you are interested in, you must be able to decide which one best fits you before buying or investing in a single property.

Trends also affect investment decisions and this must in turn also affect the way investors evaluate real estate property. For example, changing trends that affect real estate in Australia include: demographics, personal debt levels, higher density living, economic downturns, and income levels of the population. An astute investor must be able to take into account all these factors and decide on his own whether the property he is interested in will net him an income or a loss based on the factors mentioned above.

Combining all these information, a property investor can make a correct evaluation on a real estate property and identify whether that property has value or not. There is no mystery behind property assessment. All it takes is collecting data, crunching the numbers, and accepting the result.