Investing in real estate offers numerous benefits such as earning passive income, providing a source of steady cash flow, and making increased profits from appreciation. If you are looking to buy residential property as a long-term or short-term investment, you should consider these factors before taking the plunge.
Here are the top factors to consider today before investing in real estate.
Understand Your Intention
Real estate is typically a high-value investment with the potential to provide large profits or result in high losses depending on your planning. Investors who acquire property without having a firm understanding of what they want out of their investment could end up incurring significant losses in the long run. A particular property may appear to be an attractive investment initially, but it could turn out to be a poor fit for your investment plan if you’re not careful.
For example, an investor who is interested in buying a property with the intention of converting it to an office space will need to seek out a property that is large enough to accommodate office use, and will need to be located in an area that is popular with businesses.
Due to this reason, it’s important to have a set plan ready before choosing a property to invest in.
Choosing Between Newer Or Older Properties
Different types of property have the potential to generate different levels of profit. These properties may also have unique maintenance requirements. Both these factors should be taken into account before selecting the property type that is right for you.
For example, new houses typically have higher purchase costs and offer limited opportunities for capital growth. However, these properties see higher demand from tenants, and also feature to have low maintenance costs. If the property was built very recently, it may also come with builder defect warranties that are still active.
Conversely, older houses have lower purchase costs and offer good opportunities for capital growth once they undergo renovations. These properties also see high demand from tenants, but their maintenance costs and upkeep can be expensive in certain cases.
Investors will need to do a fair amount of research before choosing between a new property and an older one as it could lead to significant differences in profits.
Selecting A Property In A Suitable Location
The price of a property and the average rent it offers will depend on its location. In many cities, properties located in central areas tend to be more expensive, while properties in suburban areas tend to be more affordable.
Some people prefer to invest in properties that are located in areas that are experiencing major developments. This is because property values in such areas tend to appreciate over time as they attract more businesses and residents.
Your property’s value could end up shooting up if large businesses or corporations set up their offices close by.
If your property is situated close to public transportation such as bus stops and train stations, you may be able to charge tenants a higher rent if you intend to lease it out. Similarly, properties situated close to lakes or properties with beautiful views can be rented out at higher prices.
What Is Your Expected Return On Investment
Another important factor to consider before investing in a property is the expected return on your investment. There’s no point in investing in a property if it offers a poor ROI compared to other options. You can calculate your ROI by dividing your annual returns by your cost of investment.
For example, if you purchased a property for $280,000 and spent $20,000 on closing and renovations, your total investment would be $300,000. Then if you charge tenants a monthly rent of $3000, your annual returns will be $36,000. This makes your ROI 36,000/300,000, or 12%.
If you want to boost your ROI, you will need to charge a higher rent. However, this approach may not work if tenants have other rental options in the area. Similarly, you could boost your ROI by choosing a building with lower real estate property management costs
Does The Property Need To Be Renovated?
Many older properties are sold on the market at lower than average prices. These properties may appear to be good choices for investment until you factor in the cost of renovations. These renovation costs will factor into your ROI, so you will need to assess the property’s condition thoroughly to get an idea of how much of a makeover it requires.
Properties that were vacant for an extended period of time usually fall into disrepair and require more significant renovations. In addition to this, many properties that appear to have been renovated could still suffer from problems. This is because many renovations focus only on appearance, and don’t address roof issues or HVAC problems.
You will need to perform a thorough inspection of a property before investing in it as renovation and maintenance costs tend to add up over time. It may be a good idea to check with the building’s real estate property management crew and ask about any problems they are aware of.
A good credit score is one of the most valuable assets a property investor needs to possess. A decent credit score of 800 or higher will land you better deals and money saving tactics which can help with real estate financing options. This is because lenders view investors with good credit scores as lower risk and are more willing to provide them with loans at better rates.
Due to this reason, investors with poor credit scores have a harder time finding ways to finance their investments. If your credit score is below 600, any loans you apply for will be offered at high interest rates. Such investors will need to seek out other financing options such as hard money lenders or private money lenders instead.
As you can see, there are many factors to consider before investing in real estate. With the right planning and preparation, you should be able to pick a property that meets your unique investment needs. The key is to do plenty of research beforehand and avoid jumping into things prematurely.
Andrew Magro is Licensee at Harcourts Carlingford, a well-known real estate agency offering a full range of real estate services, specialising in residential, commercial, rental properties and property management services. Andrew has worked in the real estate industry for 16 years, which has given him a thorough knowledge of the Carlingford and Greater Hills areas.