Upside Income Potential – Overview of Real Estate Investing in Gold

Real estate investment decisions are made based on investor criteria. Unless the rental property serves some other purpose, perhaps to close a 1031 tax exchange quickly, capitalization rate, internal rate of return, cash return, or some other factor or combination of all factors, tell the real estate investor whether to make the investment or withdraw. Real estate investing, after all, is all about the numbers.

However, there is the question of any “upside rental potential” associated with income-producing 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 pass up good property investment opportunities because they do not adequately consider the potential rental income advantage of a property.

An income property with “upward rent potential” simply means that your rents are lower than what the market will bear and the “potential” to charge higher rents and generate more income is a real possibility. For the real estate investor looking at income property, it means “wait and don’t make any decisions to transfer the property until you have revalued the cash flow based on various other rental scenarios.”

Believe it or not, sellers (or their agents) sometimes, whether through negligence or faulty research, fail to consider the true income potential of the property when setting a price. If so, then any APOD, Proforma, Marketing Package or other income and expense statement presented to you misrepresents, at a minimum, the income and all key rates of return that guide your investment decision. If you don’t question yourself, and trust those numbers and view them as unfavorable, you could be missing out on a good investment opportunity. Happens.

Always conduct your own rental survey. Learn what comparable rental properties in the area are getting for rent, and then make your own assessment of what the market will hold. You may discover something the seller missed, or you may discover that the seller priced the property without considering the rental potential at all.

Then run your own numbers. Using the rents you think are most in line with the market, recalculate the cash flow, capitalization rate, cash-on-cash, internal rate of return, and other financial measures of the investment property. Who knows, you might discover a nugget of a deal you might have otherwise missed. Happens.