Real estate is one of the safest investment avenues and it can help you make a ton of money. Just think about it. You have a fixed area of land. Couple this with the ever-increasing population and it makes one thing certain — a constant increase in real estate prices.
Although this provides investors with an excellent investment opportunity, making good profits still depends on how good of an investment you make. To help you with that, let’s take a look at the 5 things that you should consider before investing in a property.
1. Your budget
You need to know the capital you’re willing to spend before you start searching for a property. Doing this will help you to determine the type of property, space, and location you should look for.
For example, if you’re low on capital, you could look for a studio or two-bedroom apartment. But if capital is not an issue, then you can go searching for villas and mansions in an upscale part of your city.
Whatever you decide to go with, just make sure you also account for the hidden costs when buying a house. These might include bank charges, insurance, renovation cost, taxes, and the fees of your real estate agent.
To be on the safe side, look for a property that is well under your budget. This way you will be able to easily pay for an unexpected cost that may arise later during the deal.
You will also need to figure out the payment plan that best suits you. If you’re planning to finance your investment via a bank loan, make sure you plan your future cashflows before finalizing the deal.
If you think you can only afford to pay smaller (and more manageable) installments every month, then you might want to consider paying a larger down payment.
2. Investment purpose
Understanding your investment’s purpose will help you choose the type of real estate you should invest in.
Here are some reasons why people invest in real estate.
- Buy and sell. Investors look for property they can sell further for a lot more by making the right renovations. Some people also buy and hold property for longer periods. They do this to benefit from the appreciation of the intrinsic value of a property.
- Buy and self-use. Another common use is to buy a piece of real estate and use it yourself. For example, people who need an office can buy a property and convert it into one. This way they’ll save on rent while also benefiting from their estate’s price appreciation.
- Buy and lease. Buying and renting out to tenants is one of the best ways to generate a regular and stable income. You can hire a property management company if you don’t want to deal with tenants and their issues.
3. Property location
Location is the most important factor for profitability in real estate investing.
This is where your investment purpose becomes important. If you plan to convert your property into an office, then you’ll have to select an area close to markets, transport hubs, and warehouses.
For residential purposes, you should look for green spaces, amenities, scenic views, and neighborhood status. Accessibility to all of these will significantly contribute to your property’s valuation.
Another thing to consider when investing in real estate is how the area is expected to evolve over your intended investment horizon.
For example, if you plan to buy and rent out a vacation house for the next 5 years, you’d want to ensure there are no planned constructions nearby that could diminish your property’s value.
4. Estimated return on your investment
You’re investing to make money. That’s why it’s sensible to invest after you have an idea about the expected return you are going to get.
The majority of the investors believe in the 1% rule. Simply put, this rule says that an investment property should generate an income of at least 1% of its total value. For example, a $200,000 property is worth purchasing only if it can generate $2000 per month.
Although it’s a good idea to abide by the 1% rule, it has a caveat. And that is if you’re planning to buy a property in an area that is still under development, you can’t expect strong returns anytime soon. In this case, you’ll need to drop the 1% rule and look for the long-term capital gains instead.
In essence, your job as an investor is to balance the risk and reward ratio for all investments. Ideally, you should try and invest in those properties where the risk to reward ratio is around 1:3.
5. Real estate market trend
Just like all markets, real estate markets also fluctuate. To make money out of this fluctuation, you need to be familiar with the ongoing market trends.
Important stats to track include housing prices, construction prices, mortgage rates, and sale trends.
On top of this, you should also be aware of the property law and tax rates in your desired market. Since these can vary from area to area, staying up-to-date with laws in all of your target markets can be a tedious job. Cut yourself some slack and hire a real estate lawyer who can take care of these things for you.
