Five Basic Theories of Real Estate Investment

There are several theories going around about how the capital flows in real estate business. Most of these theories see real estate as an investment avenue rather than as a home for the investor and the family. This article is an attempt to examine how anyone can make use of these theories to make a wise investment.  

The vacancy rate theory. This theory states that the vacancy rate of apartments determines the ruling price of real estate. The theory stipulates that there is a natural vacancy rate for every real estate market. When the vacancy rate goes up beyond the natural level, the rents tend to go down. Conversely, the rents are increased when the vacancy rate goes down below the natural level. Advice to the investor is to buy when the vacancy level is high because the prices will be low at that time. Make a profit by selling when the level is low. The normal vacancy rate can be determined by reading rent chart of the place for a period of time.

Interest rate theory. This theory is based on the fact that when the interest rates go up people disinvest in real estate to invest in cash. Thus the capitalization rate goes up. The disinvestment in real estate lowers the prices of apartments. Lower availability of apartments reduces vacancy rate and, that in turn, pushes up the rents. This is the opportunity for a real estate investor to invest in apartments at a lower price and expect a higher rent shortly. : 

Investment theory. Investments must be seen as investment and it is financing which is the tool for making a profit. Investments on real estate must be kept as such whatever the turbulences are on the economic front. The turbulences are only a passing phase. In the long term investments in real estate will remain intact. It should be seen separately from financing. The advice to the investor is not to panic sell your real estate property which you see as an investment  

Stabilized net operating income. The investor must have a long term view on prices. He or she must base the valuation of property on natural vacancy rate. Do not pay the price for the property whatever the incentive is. Even if there is a 100% occupancy rate for the moment, do not pay more because the occupancy rate and price of property are bound to fall shortly  

Decision theory. This theory is based on the past models of allocation of assets for investments. It is the study of models of judgment already made and arriving at a rational choice for the present. Optimization of allocation is arrived at using the past experience. The hypothesis is that if the factors taken into account in decision making in the past were successful, there is every chance to same yardsticks will succeed in the present too.  

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