Real estate investment decisions are made on the investor criteria. Unless the rental property serves other purpose, possibly to close a 1031 tax exchange in a hurry, capitalization rate, internal rate of return, cash on cash return, or other factor or combination of all factors, tell the immovable investor whether to make the investment or walk away. Real estate investing, after all, is all about the numbers.
There is, however, the matter of any "top side rent potential" associated with the income-producing property that circumspect immovable investors should consider before making investment decisions. This is not always the case, though. Remarkably, there are multiplication immovable investors pass on good investment property opportunities because they fail to consider the potential of a property's top side in rental income adequately.
An income property with "top side rent potential" simply implies that its rents are lower then what the market will bear and the "potential" to collect higher rents and generate more income are a real possibility. To the immovable investor analyzing the income property it means, "hold on, and don't make any decision to pass on the property until you've reevaluated the cash flow supported several other rent scenarios".
Believe it or not, sellers (or their agents) somemultiplication, whether by neglect or faulty research, do fail to consider the property's true income potential when setting a price. If so, then any APOD, Proforma, Marketing Package, or other income and expense statement conferred you, at the very least, distorts the income and every key rate of return guiding your investment decision. If unchallenged, and you depend on those numbers, and deem them unfavorable, you could turn down a good investment opportunity. It happens.
Always conduct your own rent survey. Know what comparable rental properties in the area are acquiring for rents then make your own evaluation of what the market will bear. You power uncover something the seller overlooked, or possibly discover that the seller set the price for the property with no consideration for top side rent potential at all.
Then run your own numbers. Using the rents you regard more in line with the market, recalculate the investment property's cash flow, cap rate, cash on cash, internal rate of return and other commercial enterprise measures. Who knows, you could discover a nugget of a deal you power otherwise have missed. It happens.
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