When considering an investment in real estate, there are several factors to be addressed. A few of these are as follow:

1. What are your investment objectives? Are you seeking a long-term hold or a short fix-up and sell? Is cash flow of primary importance, or are you seeking long term appreciation?
2. What is your tolerance for management? Do you want to be actively involved or are you willing to take less net cash flow in exchange for being in a passive position?
3. There is an inverse relationship between rate of return and quality of location and tenancy. A large national credit tenant in a prime location may provide the most stable leasehold situation, but the rate of return may be around 6%, and there may be no increases in the rent for several years at a time. Small local tenants in less affluent locations may have leases which call for 9% return, but the risk of failure is much higher.
4. Do you have adequate liquid assets to cover the occasional downturns in the market or unexpected vacancies? Real estate is not the most liquid form of investment. One should have adequate reserves so that any future sale of real estate need not forced, and to enable transfers to take place when the market is favorable.
5. Is the property to be used as a business location? If so, then an additional analysis comparing leasing to owning should be undertaken.
6. Are you selling an investment property? Under section 1031 of the internal revenue code, income tax may, under controlled conditions, be deferred if you reinvest in a property of equal or greater value which carries an equal or greater amount of debt than did the property being sold.
7. Using leverage (financing), and the effect on rates of return. Although a broader look at financing will be undertaken in a separate blog, it is worthwhile to consider briefly the impact of the cost of money upon the effective rate of return from a real estate investment. Many multi-family and other California properties have, in the past several years, traded at rates of return as low as 4%. One may easily argue that a CD might be a better place for your money rather than undertaking the complexities of a multi-family investment with a 4% rate of return, but the reality is even worse. If we assume that a loan is placed to acquire such a property, and that the rate of interest for the loan is 6%, then the effect rate of return for the property drops far below the 4% because of the negative leverage incident to the cost of borrowing being higher than the rate of return.
8. What is the existing competition for the tenants in the area? What are the existing vacancy rates for this property types in this market? What is the rate of absorption of vacancies in the market? Are vacancy rates and rental rates trending up or down? What new buildings are in the planning stages? Will they be preferable to the one being considered for purchase?