Five Things To Know About Investment Real Estate

Whether you’re a first time home buyer or someone considering real estate investing, at PhillyLiving, we want you to work with a realtor who will help you identify the potential of a property, will analyze it from a financial standpoint with you, and will inform you of what you might be able to expect for the area you are purchasing in. Experienced PhillyLiving agent, Sabina Palermo, will review five things to know about investment real estate. Check out her video below!

1. Know the Cap Rate of the Property

A great agent helps their multi-unit investors evaluate their current properties. There are many different evaluation metrics that can be used but the cap rate is a commonly used one as it helps investors to understand their property value. It’s important that sellers set good cap rates and that buyers learn to identify them. Here are a few facts to know about cap rates: 

• The cap rate is the net operating income  – Which is Gross income minus operating expenses divided by the value of the property or the asking price. 
• In neighborhoods that are more established (such as Rittenhouse, Fitler Square, Queen Village, Society Hill, or Graduate Hospital), there is a lower investment risk and a buyer might be open to accepting a lower cap rate. 
• In neighborhoods in emerging markets, where the investment is riskier, buyers typically want to see a higher cap rate.
• It’s important to remember that when you buy a home, you buy it many times based on emotions. With investment properties, it’s really about the numbers and whether those numbers make sense for you as an investment deal.

2. Know the Highest and Best Use of a Property

For investment buyers, identifying the highest and best use for a property or building is sometimes needed. For example, should an abandoned warehouse become condos or apartments? Should a buyer tear down the building and sell the land? Should the buyer tear down the warehouse and rebuild? There are many factors that go into this kind of decision making and a great agent will help you analyze investment deals to make the most of your bottom line.

3. Know the Differences Between Residential and Commercial Financing

For a commercial investment property, unless you are paying cash, you’ll need at least 25% down on the mortgage — and not the typical 5% as for a conventional residential loan. Multi-unit properties also require a different type of financing which is typically more expensive than strictly residential properties but can qualify for a lower down payment compared to commercial properties. Finding a lender who will approve a loan can be tricky because not all lenders are interested in commercial real estate deals. Lenders might qualify you for a loan with one building and not another because of the financials related to the business deal. It’s a good idea to work with an agent that has good relationships with lenders who are willing to do commercial deals. 

4. Know the Financials of the Deal

If you’re investing in a multi-unit property, you’ll also want to make sure you understand the financial analysis of the deal — including the rent roll, as it’s crucial to the profitability of the business. In addition, educate yourself on the new tax abatement program and which buildings and locations qualify for tax abatements.

5. Know About Commercial Zoning Related to the Property 

It’s important for investors to have knowledge of Commercial Mixed-Use Zoning – also called CMX classifications – as it informs buyers of the allowable uses or the types of businesses permitted of a certain unit. Some areas of course have limitations in terms of what can be built there and zoning is an important factor to consider when investing in real estate. It’s even important to make note of how businesses are zoned in your own neighborhood. 

• As a side note, obtaining a variance or a change in zoning codes must occur through zoning meetings with approvals at the city level. It’s valuable to work with an agent who has an understanding of various development projects occurring throughout an area so they can inform an investor of what changes they might be able to expect if they purchase a particular unit.

There are many other things to know about investing in real estate but hopefully this was helpful in giving you some basic information. Have a question about investing in real estate or want connect with Sabina? You can contact her at sabina@phillyliving.com or 215-821-5527.