Investing In Hottest Real Estate Market with Good Cash Flow
While buying a property in order to get profit, there are usually two options you can go for. You can either go for the purpose of a property in hot real estate market with little cash flow or you can buy a property in a market with less potential but with good cash flow. While many investors do not like to go for the option A due to the fact that most of the people want quick cash, the option A truly has the potential to provide you with the profit you have been dreaming for.
What gets more interesting here is the fact that there may be a way you can combine the best both the option A and B, i.e. investing in hot market with great cash flow. It may sound contradictory to many people there is a way you can do that.
First we are going to discuss about the investment fundamentals here.
The cap rate
You have everything to do with the cap rate when you intend to invest in a property. Surely you would want the newly purchased property to have potential to give you the profit of your desire. Cap rate, or capitalization rate, is basically a difference between net operating income (NOI) and purchase price, i.e. purchase price divided by NOI. If the cap rate is higher, it means that you are paying less for a property that is going to provide you with the better cash flow.
The logic behind availability of two options
It’s quite simple. If a real estate market has great potential in terms of population growth, job growth, rent growth and higher occupancy, you would want to pay higher even the property there is unable to provide you with the better cash flow at the moment. The reason you are paying more is that the property has certain potential to provide you with the better revenue. This is what investment is all about. The investment may seem bigger but this bigger investment may mean better profit in the future.
Similarly, if the cap rate is higher, you may be paying less for the property which generates relatively better cash flow. This is the scenario related to lack of fundamentals in the area. While you may be eyeing at the quicker profit, you may not be able to progress in the future.
The third option
With the availability of two options mentioned above, you may tend to think that you have nothing more to go for. The matter of fact is that there is another option. You will just have to look for the area which is going to have population in the next few years. You may be able to figure out that the area currently lacking the fundamentals is going to have everything in the future to become a hot market. There are certain areas where government would want to shift population from the highly saturated areas. It may not be a bigger problem for you to find out such areas. Even a quick Google search may be able to let you know about the cities that going to have populations in the near future.