Market Update: Investors are jumping back into the market. Should you consider becoming an investor? Here's some advice...

When investors come back into the real estate market, as they are now, you know the real estate market is getting stronger.  I would even venture to say that the investors brought the market back.  What makes real estate investors different from regular buyers is their understanding of the risk/reward balance. 

Savvy investors must understand and weigh the risk factors associated with market trends, property values, rental income, etc. Three common types of investors in the real estate market are:

1)Smaller investor/longer term -can be a starter/novice investor and usually involves less risk.  These investors tend to invest in condos and 1 to 4 family houses, where rents will cover the investment and mortgage payments. I caution that this type of investment is similar to running a business and therefore entails a lot of work. The investor must deal with tenants directly because it often doesn't pay to hire a management company.  However, this scenario can have a very positive outcome due to capital gains and increased rental income.

2)Larger investor/longer term- these are usually experienced investors in larger buildings.

3)"Flipping"- investors purchase property to fix up and re-sell quickly.  This is a higher risk investment.  The investor must be knowledgeable about construction and keep a close eye on property values and costs associated with renovation.  I have flipped houses, and would be happy to discuss this further if you have an interest.

A Smaller Investor Story: I sold my client a 3-family house in New Rochelle, for $450,000 and the rent roll was $3,900/mo.  The rents were undervalued because of their condition, and the fact that the previous owners did not manage the property like a business.  Due to that, and other market indicators, I saw an opportunity to increase those rents.  As tenants moved out, the apartments were renovated and rented at "market rents." Within the first year, I was able to assist the owner to increase the rent roll to $4,900/mo.  At a 10% "CAP Rate", the $12,000/ yr increase in net income translated to an increase in property value of approximately $120,000. Within 2 years, I sold this property for my client for $570,000. A 10% rate of return or "Cap Rate" is better than you will find in most stock and bond investments.

Here's what the "Cap Rate" means: generally, investors look at the cap rate of the investment property, which is an indirect measure of how fast an investment will pay for itself. In real estate investment, real property is often valued according to projected capitalization rates which are used as the investment criteria. Capitalization Rate = Net Operating Income/ Purchase price.

If you are a novice/first time investor and look to purchase a smaller property, the goal is to locate one that has under-valued rents and may need some work. If you can find one, you can increase the value of your investment by charging higher rents as my client was able to do.  

I have personally successfully invested or advised clients in each of the 3 categories.  Having experience as an investor since college, I am a qualified resource to help you understand the risk/reward balance in real estate investing.  If you are curious about investing, or on the fence, I can help you decide if this option is for you.  I will also work closely with your financial planner to tailor your real estate investment goals.

Michael Marciano, Keller Williams NY Realty 120 Bloomindale Rd, Ste.101 White Plains, NY (O) 914.721.0038 (C) 914.804.6098 - See more at: