Upward Income Potential: Searching for Gold in Real Estate Investments

Real estate investment decisions are made at the discretion of the investor. Unless the rental property serves some other purpose, perhaps to close a 1031 tax swap in a hurry, capitalization rate, internal rate of return, cash back on cash, or some other factor or combination of all of the factors, tell the real estate investor whether to make the investment or walk away. Real estate investing, after all, is about numbers.

However, there is the question of any “upward income potential” associated with income-generating property that prudent real estate investors should consider before making investment decisions. This is not always the case, however. Surprisingly, there are times when real estate investors overlook good property investment opportunities because they do not adequately consider the potential for a property’s advantages in rental income.

An income property with “rising rental potential” simply implies that its rents are lower than the market will support and the “potential” to charge higher rents and generate more income is a real possibility. For the real estate investor looking at the property for income, it means, “Wait and make no decision to transfer the property until you have reassessed the cash flow based on various other rental scenarios.”

Believe it or not, sellers (or their agents) sometimes, either through negligence or faulty research, don’t consider the property’s true income potential when setting a price. If so, any APOD, proforma, marketing package, or other income and expense statement presented to you, at the very least, distorts the income and all key rates of return that guide your investment decision. If they don’t challenge you, and you trust those numbers and find them unfavorable, you could miss out on a good investment opportunity. Happens.

Always conduct your own rental survey. Know what comparable rental properties in the area are getting for rentals and then make your own assessment of what the market will hold up. You may discover something that the seller overlooked, or you may find that the seller priced the property with no regard for rental potential at all.

Then run your own numbers. Using the rents you think are most in line with the market, recalculate the investment property’s cash flow, capitalization rate, cash over cash, internal rate of return, and other financial measures. Who knows, you might uncover a nugget from a deal that might otherwise have been lost. Happens.

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