vestment in income real estate -or, indeed, any investment involves five basic steps (Sirmans & Jaffe, 1988, p. 3). First of all, the reason for investing must be considered. Is the investment intended to provide a steady income flow, or is it intended to accumulate a capital value to be "cashed in" only when the investment is liquidated? What is the economic climate for the investment, in terms of both operating considerations (costs and income) and prospective capital gains or losses? What is the anticipated cash flow (bearing in mind that a real estate investment, even one made primarily in pursuit of long term capital gains, must provide a cash flow sufficient to meet expenses)? Finally, how in fact does the prospective cash flow compare to prospective expenses?
There are, broadly speaking, three approaches to the analysis of a real estate investment. The first is a general analysis and evaluation of the fundamental considerations involved, as briefly outlined above: direct management, cash flow, capital gains, and so forth. The second is what may be called the mathematics of real estate: the arithmetic, straightforward in principle but involved in detail, of mortgage loans, taxes, insurance and other expenses, and the other numerical elements that spell the success or failure of a particular investment. Finally, there is an analysis of the prospective investment climate for real estate, in a given town or region, or nationally. The following study concentrates on the first and third of these; the second or arithmetic analysis of an investment can be made only on a case by case basis, and involves the specialized skills of accounting. The real estate investor does not have to be an accountant, but it is worth noting here that keeping good books is an important element of successful investing (Wick, 1987, pp. 126-137); indeed, it is the only way to know whether an investment is actually paying off or not.
A ...