Real estate investing is seldom for the fun of it. Real estate investors simply do not decide one given day that it would be entertaining to take cash out of the bank in order to purchase a tenant problem in any apartment building. Real fun is taking the kids to Disney World. Real estate investing is about making money. And the reason people start real estate investing is to make a lot of it.
It is not about luck, however. The most successful real estate investors do not purchase income property on the flip of a coin. Real estate investors who succeed understand that the real money is made in real estate investing when value can be added to the property. If you are new to real estate investing, you may be unaware of six things that can add value to an investment property. So you are encouraged to consider them whenever you purchase or own rental property.
- Inflation- Inflation increases rental property value simply because of the increased cost to replace the property. The increased cost of land, building permits and fees, materials, or actual construction adds value to properties already in operation.
- Improved infrastructure- This is the effect due to development around the property. Roads, electricity, water, and sewer systems, police and fire protection, parks, hospitals, and so on have a major effect on the value of property.
- Economic conversion- When the use of a property changes, like when new zoning laws allow you to convert a small apartment building to offices or a single-family home into a four apartments it can add value.
- Increased cash flow- It is understood that real estate investors buy the cash flow in rental property. An investor who is able to increase the cash flow (assuming other factors do not change) will increase the resale value of income property.
- Capital improvements- Unless the value of the land makes capital improvements superfluous, adding extra apartments to a building, or an extra bedroom or bathroom when the market demands it, can increase property value.
- Supply and demand- The shortage of available rental property at a time when the demand for rental income property is high drives rental property values up. This makes it important to pay close attention to the local market, because when your town or region has room to absorb more, and investors are there to buy, your rental property value will increase.
Most of these factors are not in the hands of a real estate investor. You cannot (for example) control improved surrounding development or prevent the construction of additional units that may flood the market and thereby drive your rents down. But you can research it.
Meet with your local planning and building department. Ask them about their comprehensive plans for the area. Learn whether zoning can be changed that would permit a more profitable use for the property. Discover how many permits have been issued to builders for the construction of comparable rental properties in the area.
Always keep in mind that successful real estate investing is not accidental. Real estate investing is a business, and it is incumbent upon you (as CEO) to diligently research ways to make that business profitable.