When people first start out in Real Estate Investing they tend to focus on how many deals they can make. They are trying to achieve a certain amount of income so they figure they need a certain amount of deals to make that much money.
Evaluating A Real Estate Investment for Rental Purposes
A lot of people looking at investing in rental real estate are using something called the capitalization rate (or “cap rate”) to evaluate the financial viability of a potential investment.
The cap rate represents the return you would get on a real estate investment if it was fully capitalized. What that means is that if you were to pay all cash (fully capitalized) for the property you would earn that percentage return on your investment. So, basically, it doesn’t include any costs associated with financing, i.e. no mortgage.
Your Investment Must Cash Flow
You should never acquire an investment property where your profit is based on an expected future price.
I have seen some investment proposals where the promoter is pitching deals that even have a negative cash flow now … but a high return later. That higher return is based on expected appreciation and a higher price.