NetGain Real Estate has a new essay up looking at the correlations between market corrections and real estate
What should real estate investors do? Follow a simple three-point program. Although there are exceptions to every rule, this program applies to most real estate.1. After consideration of reasonable market debt (40% to 70%), does the property under consideration have cash flow (not including depreciation and non recurring expenses)? If not, discard the property and move along to the next one.
If number one passes muster, then move to number two.
2. Determine the quality of income. Expenses are very important and need to be carefully examined, but the success or failure of most properties will ultimately be determined by its income. The quality of income means exactly what it says. How sound is the income? What is the financial strength of the lessees? How committed are the lessees to staying at the property? How efficient (financially) is it to replace a lessee?
If number two passes muster, then move to number three.
3. What is the future growth of the income stream? Do the leases have annual bumps? Will lease increases be consistent with the market or will negative gaps develop? Are there sound reasons for believing that current and future lessees would pay more rent?