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Adam Hochfelder’s Real Estate Investment Rules And Capitalization Rates

People want to ensure financial freedom and enjoy life without constrictions. In fact, making more money is probably one goal that people have in common, no matter how different they might be. Nobody likes to worry about money, that's for sure, and working toward financial security takes a lot of time and effort. With that being said, the only question remaining is: are you ready to put in the work vital for stable financial future. To achieve financial freedom you first need to set your mind right about earning money.

As a real estate investor, Adam Hochfelder has learned just how important it is to own your business instead of it owning you. Even though most people invest their money in the stock market, Mr. Hochfelder prefers investing in income producing real estate, mostly because it offers actually visible results. Compared to other asset classes like corporate bonds and Treasury notes, real estate investments historically show the highest correlation to inflation.

Rising interest rates are driving entrepreneurs back to the banks, looking to fund real estate projects. Real estate is an unpredictable business that can either bring large profits or large losses and much like the stock market, it's almost impossible to time it perfectly. When it comes to investing in real estate, same as in any industry, the first lesson is: Do your homework and research. In order to do that you need to learn the terms of real estate, and understanding the Capitalization Rate, or CAP rate, is one of the most important elements.

The capitalization rate is the rate of return on a real estate investment property based on the income that the property is expected to generate. The cap rate represents metric by which real estate investments are measured, with no risk of financial loss. It is a fundamental concept in the real estate industry that is used to estimate the investor's potential return on his investment. Not only it is very common, but is also very useful ratio in the real estate industry, as it can be helpful in different scenarios.

In practice, different capitalization rates represent different levels of risk. That means low capitalization rates imply lower risk, while higher capitalization rates imply higher risk. One way to get a capitalization rate is to calculate the property's annual net operating income divided by its purchase price. There are several things you need to look for when figuring the right CAP rate for a property.

As we all know, in real estate, location is everything. The value of a real estate property is driven by demand, and demand is mostly affected by location. The closer you get to downtown, the higher the prices are, and the same thing goes for real estate. In commercial real estate, generally, the prices are higher, which means capitalization rates are therefore lower. Many investors pay more for assets located in central business districts because they believe there is lower risk than in the suburbs.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.