Real Estate Investing for Beginners: Value Added and Value Driven Investments

Real estate investing for beginners includes some important concepts regarding the amount of capital available to invest and the earnings desired to make the investment worthwhile. While these figures are solely subjective and can completely differ from instance to instance, there are primarily two types of investments to be considered: value added investments and value…

Real estate investing for beginners includes some important concepts regarding the amount of capital available to invest and the earnings desired to make the investment worthwhile.

While these figures are solely subjective and can completely differ from instance to instance, there are primarily two types of investments to be considered: value added investments and value driven investments.

Value added investments are going to provide more significant returns, particularly in the long run, since the risk is usually higher. A standard value added property will produce a 12% to 25% return on investment depending on exactly how long it takes to optimize its value.

Value driven investments are secure financial commitments backed by constant leases with intermittent rental increases which will give you a return in the 6% to 14% range based on the demographics, marketplace, age of investment, tenants' credit rating, etc. These properties will generally become more competitively priced the larger they are as institutions will compete for the larger ones (over 100,000 square feet).

Since institutional buyers require a reduced return, they will unduly propel the price up to a point where it's no longer advantageous for a smaller buyer. I generally advise focusing on properties which can generate in excess of a 10% return, meaning that both you and also the investors can make money.

Another important concept in real estate investing for beginners is to understand the importance of using leverage. Leverage is the use of borrowed funds to complete an investment transaction. The higher the proportion of borrowed funds used to make the investment, the higher the leverage and thus the lower the amount of equity.

I suggest that on value driven investments you use no greater than 70% leverage; however, in value added investments, my experience is that you can put on as much as 100% leverage hinging on just how quickly you can actually do the things which are going to increase the value.

Taking these concepts into consideration will help you determine what kind of property will meet the parameters required to achieve your financial objective.

If you overlook a property that meets or surpasses your criteria and you desire a loan, present it to a bank or a mortgage broker who will usually shop it around as well as find you some basic quotes. You can then ask them to issue you a letter of intent setting out the terms at which they will be able to provide a loan to you.

Getting a clear idea from a lender of how much your monthly mortgage payments will be will help you determine how much cash you need to invest and what your cash on cash return will be. And this should absolutely help you decide on whether or not you should buy a particular property.

As you can see, real estate investing for beginners can be easy when the questions about the investment are resolved in advance of any potential acquisition. Careful preplanning that is well thought out will result in successful investing.