Evaluation Of Income Property.

Income property is becoming a more attractive field to investors looking for a better return on their money. With today’s low interest rates, income-producing properties such as apartments and duplexes can produce exciting returns.As with any type of property, the value of income property is what someone is willing to pay for it. But, the main determinant of value for income property is the net income it will produce. As we'll see later, the income approach should closely correlate with the market value under normal market conditions.

Buyers of residential income property will want to know the answers to several questions not normally asked by home buyers. First, what is the amount of cash flow the property will generate? Second, how much actual net income will it produce? Third, are the tax benefits that the property will provide the investor? And fourth What is the time it will take to get the return?

Cash flow can be described as the amount of money collected as rental income each month. This is the gross amount of money generated and does not consider expenses. Of course, cash flow is reduced when there are vacancies in the property.And the biggest risk in this field would be the increasing competition and demands.

The most important consideration when evaluating an investment in real estate is determining the rate of return you can expect to receive. Since you can put money in a C.D. and expect to earn about a 5 1/2% return, you would certainly want to earn a better rate for a riskier and more il-liquid investment such as real estate.Rates of return are computed on the amount of money invested. Typically, investment property requires a down payment of 25%, which would be the cash invested. The remaining portion of the purchase price would be financed by a mortgage.

Income property values are influenced by many uncontrollable forces. In addition to the effect that interest rate risk and government tax policy have on the value of income property, competition can be ruinous. In areas where new apartment construction attracts renters away from the older properties, only lower rents will keep tenants. And that will reduce your return on investment.

During the 1980's we saw the same type of competition sink even in the best conceived office buildings and shopping centers when supply overwhelmed the demand. A landlord has little or no control over such developments and must be aware of changes in the market place.

It might even be a good idea to get a new appraisal on income property every two or three years just to understand where things are headed. Knowing when to dispose of an investment is just as important as making the initial investment decision.