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Passive Income Real Estate Investing: What’s Really Important?

Published on Tuesday - November 18, 2014

What is really important when it comes to evaluating and choosing between income investment properties?

There are many factors that come into question when looking for income investment properties. For new real estate investors, these factors can become a distraction. Over analyzing is one of the biggest aspects investors need to learn how to avoid. Others get taken on expensive detours due to chasing the wrong features. Having said that, are new properties better than existing ones? How important is property condition? Are multifamily apartments really better than single-family homes? What priority should taxes be given in the decision? Does property value even matter if you are investing for cash flow?

These questions and decisions can be seriously counterproductive, and often rob newer real estate investors of  the ability to get started. Let’s rip through some of these hurdles so that you can get right to investing in the properties.

Property Condition: New Vs. Existing Homes

The debate over whether new or existing homes are best for income investing can often get heated. There are fans of both. Both can have their pros and cons. New homes and condos look shiny, can be customized, might mean less maintenance for a while, and can look good in rental ads. However, they might be tougher to rent, start investors off in negative equity, and yield less cash flow. Existing homes can offer a lot more value, mature rental neighborhoods, and allow wider spreads. There are even new hybrid options in acquiring recently renovated and remodeled homes for less than the price of new – offering the best of both worlds.

Single-Family versus Multifamily Rental Properties

There are many debates over whether single or multifamily properties are better for passive income seeking investors. Large funds are often restricted to large apartment buildings, due to their structures. Even some mid-sized investors find it to be less work to put all their cash into more expensive apartment complexes rather than sniping and honing in on what may be more profitable individual units. For smaller, individual and mid-sized real estate investors, single-family rental homes can have many advantages too. The spreads can be better, individual units can be easier to dispose of for higher profit margins, and the built in diversity can go a long way in ensuring long term success.

The Most Important Factor in Income Property Investing

Hands down, without fail, the single most important thing for rental property investors is the numbers. In one sense, it really doesn’t matter what the property looks like, its location, or if it is a single-family home. None of it matters if the numbers don’t work. On the other hand, if the numbers are there, it can make sense, even if the property itself might not be the most dazzling.

In fact, appearances can be a significant trap when it comes to income property investing, and real estate investing in general. Even brand new properties, selling for tens of millions of dollars, can have major structural issues. Trophy and dream properties can also make terrible investments when they cause real estate investors to make emotional or ego based decisions rather than sound financial ones. These properties can cause investors to overpay and to hold onto them too long.

Put the numbers first. Know your primary goals and priorities in investing and use those as your checklist. For most private investors reading this, income is a priority. So which properties will deliver the best income?

Taxes, Asset Values & Income Property Performance

Taxes, return of investment, consistency of performance, and values are also important factors that warrant your attention. Taking taxes into consideration upfront can make a massive difference in net results and gains. More important than return on investment, is return of investment. No promise of record breaking returns will matter if the principle is evaporated.

It is critical to verify assumptions and statements, factor in all expenses including reserves and inflation, and to secure a great property management company that will ensure cash flow is optimized.

Appreciation and equity growth can be great bonuses, but are definitely second or third on the list of factors to watch. If held long enough, all properties will experience value fluctuations. What is most important is where the value is likely to be when you plan to liquidate. The dips and peaks in between may be completely irrelevant. So look for the best income producing properties if that is what you desire. Watch the numbers first, and find the properties which check the boxes, rather than looking at properties and trying to force numbers to work.

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