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Real estate investment projections:
Where can you go wrong?
What are the common errors investors make?
Let's discuss.
Where can you go wrong?
What are the common errors investors make?
Let's discuss.
When making projections into the future for real estate income properties, you need to be realistic about the assumptions being made.
Here are some common mistakes:
Here are some common mistakes:
1) Mismatched growth rates between rental income and expenses.
If you are projecting rental income to increase 3% annually and operating expenses by 1% annually, this will skew your NOI and before-tax cash flow.
I.e., returns will increase over time as you generate more NOI
If you are projecting rental income to increase 3% annually and operating expenses by 1% annually, this will skew your NOI and before-tax cash flow.
I.e., returns will increase over time as you generate more NOI
2) Projections for vacancy losses that are not similar to market conditions
If you are projecting a vacancy rate of 2% and the market average is 5%, then you are falling short.
Returns will be higher on paper but you are likely to have lower operating results.
If you are projecting a vacancy rate of 2% and the market average is 5%, then you are falling short.
Returns will be higher on paper but you are likely to have lower operating results.
3) Selling capitalization rates
If you are determining the property sale price by using a capitalization rate, make sure it reflects the property's age and remaining economic life.
You can dramatically shift the outcome to the upside by using an inappropriate cap rate.
If you are determining the property sale price by using a capitalization rate, make sure it reflects the property's age and remaining economic life.
You can dramatically shift the outcome to the upside by using an inappropriate cap rate.
4) Underestimation of sale and reversion costs
When modeling the exit of your property, double-check your selling costs.
Do not underestimate these.
The transaction costs to sell the property can be significant.
When modeling the exit of your property, double-check your selling costs.
Do not underestimate these.
The transaction costs to sell the property can be significant.
Those are a few of the main ones. If anyone else has any major mistakes that investors make, I would love if you could post them!
REM.
REM.
