Reasons Why An Objective Risk Model Pays Off In Real Estate Investing

Reasons Why An Objective Risk Model Pays Off In Real Estate Investing

Winner’s curse is one of the most critical aspects of real estate investing. It is a situation where the winner of a bid pays more than the worth of the property. It is an unfortunate occurrence since no one wants their efforts to go into waste. Performing objective due diligence is the best way to dodge the curse or any other unforeseen circumstances. Additionally, it helps to overcome bias in decision making.
Although the winner’s curse is unfortunate to an investor, it is a benefit to real estate fund managers. This is because they can differentiate early enough whether a valuation is optimistic or conservative. The curse has also caught experienced investors. They tend to overlook certain property fundamentals or rely on unviable strategies.
Atlantic Richfield engineers noticed that sometimes aggressive bids might prove to be too optimistic. They discovered that in the oil and gas auctions, essential information might be hidden beneath the surface.
Although valuations may vary in different industries, in real estate, prices might not reflect the underlying value. This is maybe due to the risk in investment property of setting the wrong prices, false assumptions or business plans that are not feasible. Furthermore, in private equity real estate, there is the rush to close the deal instead of waiting for the right opportunity or time.
For most investors, sticking to conservative strategies seems the most rational thing to do. However, behavioral economics indicate that markets are not always rational. In most cases, sellers hold unrealistic prices while buyers concentrate on factors that do not add intrinsic value.
There are limitless deals in the real estate industry. However, it is advisable to carefully check the inefficiencies that prevent investment opportunities to achieve the expected value. In fact, nowadays there is growing data science that can help to evaluate properties before committing an investment.
Due diligence is the best way to control the risks involved in real estate investment. However, it may not provide the nature of the risks. There are two major lessons when investing in real estate. First, joint ventures do not always guarantee favorable returns. Although getting into partnerships might reduce structural risks, they also limit control of investment and ultimately lessen the proceeds. Second, making off-market deals does not always guarantee a better return on investment. Therefore as an investor, find a suitable data-driven procedure that will help evade the winner’s curse.
How Technology Has Solved Two of the Biggest Problems in Real Estate Investing

How Technology Has Solved Two of the Biggest Problems in Real Estate Investing

If you want to be a better real estate investor, you have to overcome common challenges. The two biggest problems that real estate investors face is finding the property and then actually getting the funding to acquire it. However, it doesn’t have to be as hard as it used to be. Here is how technology is changing the way people solve these issues:

Properties

Finding properties is one of the biggest challenges that investors face. After all, the market value of an area is not set it stone. In order to understand if something will pay you back, you need to know the area.

Location Scouting

You can now know about an area and what kind of demographics it has easier than before. First of all, with online maps, you can scout it on your laptop. Secondly, people on the ground can be hired to walk around and film with a drone to capture video so you can really get the feel for the location.

Sales Trends

You can look into the local economies of locations that you are considering. See how their local businesses have been doing in recent months with sales. In addition, find out the employment rates to make sure there is an economy that is healthy enough to support the investment you are looking to make before just jumping in without the information.

Funding

The Need for Capital

You might have the best information in the world, but you still need funding to get that property. Therefore, raising capital has always been a burden to investors. Thanks to technology, there are new options, however.

Crowdfunding

Using public sites you can raise funds from investors, large and small, all around the world. This lets you act quickly on properties without breaking the bank. In addition, you might find properties that you didn’t otherwise think you could afford.

When it comes to real estate investing, it can be one of the most lucrative opportunities in the world. However, to make money with real estate, you need to find the property first. Then, you need to get the funding to purchase it. Technology has made these two things much easier than they ever were in the past. Therefore, you should look to utilize this technology in your own career to leverage the benefits contained.

The Power of Leverage in Real Estate

The Power of Leverage in Real Estate

While many people are rightly skeptical of going into debt, experienced real estate investors know that the judicious use of leverage can dramatically boost their bottom line. Leverage is used by real estate investors to boost what is known as their internal rate of return. This is simply a reflection of the fact that the less capital one has invested, the higher their potential return on invested capital is.

How does leverage increase returns?

If a new real estate investor had $50,000 to put towards the purchase of a property, they would have a number of options on how to best invest that money, starting with whether or not they wanted to use mortgage financing or pay cash. Some people may opt for the latter option, deciding that the risk of taking on mortgage payments is beyond their tolerance levels.

However, for the astute investor, using mortgage financing can provide a much higher rate of return. In the case of buying a property for $50,000 in cash, if that property nets $5,000 per year of income, then the total rate of return on capital for the property will be 10 percent. However, if that same $50,000 is used on a down payment to buy a $200,000 property with the same 10 percent return on the purchase price, the return on capital for the second deal will be 40 percent! This is because the investor is earning $20,000 per year of income but has only invested $50,000 of their own capital.

It is important to understand that leverage works best, by far, when rents and property values are rising. Using leverage can still work in other markets, but investors need to have sufficient liquidity to cover downturns, such as high vacancy rates or declining overall property values. Generally speaking, investors should stay away from using leverage in markets with a negative macroeconomic outlook for the short to medium term. While these investments can still prove to be highly profitable over the long term, the short-term capital requirements can bankrupt smaller investors.

The best way to mitigate the risks of using leverage is to perform in-depth due diligence on the local macroeconomic trends. Study trends in property values, employment quality, and quantity and net migration trends. Try to avoid entering into leveraged real estate deals near market peaks.