What to consider before investing in real estate? Ideally, one should consider many factors, including a property’s location, its valuation, profit opportunities, one’s purpose of investment, and more. Considering all these factors and more will help you determine if your chosen investment opportunity is the right fit for you.
Let’s dive deep into the things you should consider before investing in real estate:
Location Is Tied to Profitability
A property’s location helps determine its eventual price and boosts or depreciates the profit you stand to make from your investment. If you want to invest in a residential property, it’s best to choose a house that is closer to parks, amenities, green spaces, scenic views, and other residential neighborhoods. However, if you want to invest in a commercial property, look for one that is closer to warehouses, freeways, markets, transport hubs, etc.
With that said, you also need to consider the location from a long-term perspective. After all, what appears to be barren land at the back of a residential hub can turn into an unsafe neighborhood or noisy manufacturing factory, which will depreciate the value of your property in that residential area.
So, make sure to review the ownership and intended use of the areas you plan to invest in. Connect with people in charge of urban planning to gain access to long-term planning and determine whether your investment will be favorable in the long run or not.
The Importance of Property Valuation
Property valuation is essential for financing during the procurement, price listing, insurance investment analysis, and taxation process. The most commonly used method to evaluate the worth of a property is to compare the recent sales of similar properties.
You can perform this comparative analysis for both old and new properties. For new constructions, consider the cost of the land and construction without the depreciation. For rental properties, consider the income approach, which will enable you to assess the property based on the income it will help you generate.
The Purpose of Investment
Since the world of real estate investments offers low liquidity and demands higher investments, you need to determine a clear purpose of investment before taking the plunge. Otherwise, you might face financial distress down the road.
Identify your reason for investment, which could be buying the property for your own use. It will save you from paying rent while enjoying the property’s value appreciation. You might also buy a property for leasing it, enabling you to earn a steady income and focus on long-term value appreciation. However, it’s not easy to be a landlord as you will need to manage tenants, repair work, legal issues, etc.
Another option for investing in real estate is to sell the property quickly for a small to medium profit. In this case, you construct the property and then sell it after its completion. Lastly, you can invest in a property and sell it based on a long-term goal to benefit from a large value appreciation amount. It can help you achieve your retirement goals.
Expected Profit Opportunities
Another factor to consider before investing in real estate is how much money you’ll be left with after the expense and if you will be able to generate profits to ensure maximum return on investment. If it’s a rental property, determine the expected cash flow.
Consider the long-term price appreciation for long-term investments. Don’t forget to add the benefits of depreciation and available tax benefits. Perform a thorough cost-benefit analysis of renovation before the sale to get a better price. Lastly, make sure to analyze the cost and benefit of value appreciation and mortgaged loans.
While there’s no harm in taking out a loan for a house, you need to understand how to handle home loans to avoid high debt levels so that you don’t face future financial duress or high debt obligations. Depending on your current and expected future earnings, consider the type of mortgage that would work best for you.
Each type of mortgage has its distinctive risk profile, and you need to study all residential and commercial mortgages to determine which one will be the best fit for you. Make sure you’re aware of the terms and conditions of the mortgage you end up choosing. Shop around to find a reliable financier who can offer you better terms and lower interest rates.
Pros and Cons of New & Existing Constructions
Existing constructions offer faster access, established utilities, lower costs, convenience, established security, but might also demand more upkeep and have older fittings. New properties typically offer attractive pricing, customization options, contemporary amenities. However, they also come with risks, such as the uncertainty of undeveloped or newly-developed neighborhoods, increased costs, unforeseen delays, etc.
To assess your cash flow, it’s best to review appraisal reports and property deeds for existing properties and consider the outstanding dues, monthly maintenance costs, etc. For leased properties, find out if they are rent-stabilized, rent-controlled, or free market. Determine if the lease is about to expire and if renewal is favorable to the tenant.
Understand Your Credit Score
Lastly, you need to consider your credit score before investing in real estate. It will affect your ability to qualify for a mortgage and impact the offer and interest rate you receive from lenders. You will receive better loan terms if you have a higher credit score. Scores greater than 800 are excellent, and more than 720 are great. If you have a low score, you can improve it by paying your bills on time, paying down your debt, aiming for less than 30% credit utilization, reviewing your credit report, disputing any inaccuracies, etc. Once your score improves, you can find a lender willing to give you a better offer for investing in real estate.
The Bottom Line
Real estate is a promising way to diversify your investment portfolio. It has a low correlation with other significant asset classes, which means that even when stocks are down, and the economy is suffering, real estate is often up. Depending on the type of investment you make, you can benefit from steady cash flow, substantial value appreciation, risk-adjusted returns, and other benefits. That said, you need to consider the factors mentioned above before making a real estate investment.