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August 29th, 2012 10:53 AM by David W. Welch
Prices are still low, but certainly trending upward here in Orlando. Interest rates are also at historic lows, but also trending upward. With 13 months in a row of year over year increases in the median price, more folks are betting the Orlando real estate market is on the mend. Some of you may be thinking this is a good time to buy property here as an investment, but you may not be sure of the best way to evaluate your options.
I am going to try to make it simple, by using bonds as an analogy from the investment world. If you have invested in bonds in the past you know there are investment grade bonds usually rated Bbb or higher, and there are junk bonds. Investment grade bonds usually have a lower return, but offer better security in terms of preservation and eventual return of capital. Junk bonds offer a higher return, but carry a somewhat greater risk of default. The same in true in real estate investing.
If you are more concerned about preserving your capital investment, look for homes in solid areas with good locations. You will have more competition from home buyers in these areas, and will likely pay a higher price resulting in a lower return. However, when you are ready to sell, you will more likely receive a return of your investment. If return is more important to you, look at multi-family, mobile homes, apartments or houses in less desirable areas. Rents will be lower, but prices will also be much lower on these types of properties. You should expect a much higher potential return. You may have more headaches with these properties in the form of turn over, repairs and evictions, but you should still be able to net a higher return on your initial investment.
The return you receive on your investment or capitalization rate "cap rate" is how you should evaluate real estate investment options. Do not try to evaluate real estate investments based upon potential appreciation if you are buying to hold. If appreciation is your primary method of evaluating real estate investments, then you should stick to short term investing. This type of investing is often referred to as flipping. It really relies on arbitrage, and your ability to find and secure properties at a price below the market. The people that consistently make money at this often re-sell to other investors purchasing for the income stream or novice investors who try to turn around and flip the house to someone else. If you do not know what you are doing, you could end up being that novice investor stuck with a property that you cannot re-sell for a profit. If you are going to get into this, you absolutely must know what the market value of the property is. I try to keep these short, but I hope this is helpful. Happy investing.
David Welch Real Estate Optimist, Orlando Real Estate, Search for Homes