When you think of real estate, what is the most important thing to look for? We have all heard ‘location, location, location’, but there are numerous factors that help determine if an investment is right for you. Here are some of the most important things to consider if you are planning to invest in real estate.
1. Property Valuation
The valuation of a property is important for financing during the purchase, listing price, analysis, insurance, and taxation. All of these depend on real estate valuation. Some commonly used real estate valuation approaches include:
Income Method: based on expected cash flows-suitable for rentals
Cost Approach Method: the cost of the land and construction, minus depreciation-suitable for new construction
Sales Comparison Method: recent comparable sales of properties with similar characteristics-most common and suitable properties for new and old properties
2. Investment Horizon and Purpose
Given the high-value investment and low liquidity in real estate, there may be unexpected results including financial distress-especially if the investment is mortgaged. Identify which of the following broad categories fits your purpose and do your due diligence:
Buy and self-use. You will save on rent and have the benefit of self-utilization, while also getting value appreciation.
Buy and lease. This provides a regular income and long-term value appreciation. However, you will need a strong landlord to handle possible disputes and legal issues, manage tenants, repair work, etc.
Buy and sell (short-term). This is generally a quick, small to a medium profit-the typical property is under construction and sold at a profit on completion.
Buy and sell (long-term). This is generally focused on a valuable property that will appreciate over time. This offers alternatives to complement long-term goals, like retirement.
3. Profit Opportunity and Cash Flow
Cash flow refers to how much money is left after expenses. Positive cash flow is essential to a good rate of return for an investment property. Develop projections for the following modes of profit and expenses:
Cost-benefit analysis of mortgaged loan vs value appreciation
Cost-benefit analysis of renovation before sale to get a better price
Benefits of depreciation and available tax benefits
An expected increase in intrinsic value due to long-term price appreciation
Expected cash flow from rental income (inflation favors landlord for rental income)
4. Property History
New construction usually offers more attractive pricing, customization, and modern amenities. The risks involved may include delays, increased costs, and the unknowns of a newly-developed neighborhood. Here are some key factors to consider when deciding between new construction or an existing property:
Review past projects and research the construction company’s reputation for new investments
Review property deeds, recent surveys, and appraisal reports for existing properties
Consider monthly maintenance costs, outstanding dues, and taxes. These kinds of costs will affect your cash flow
With leased properties, find out if it is rent-controlled, rent-stabilized, or free market. Is the lease about to expire? Are renewal options available to the tenant? Who owns the furnishings?
Quality check items such as fixtures and equipment, if these are included in the sale
5. Property Location
We mentioned it at the beginning of this article; location, location, location. It still continues to be the most important factor for profitability in real estate investing. Proximity to amenities, views, green space, and neighborhood status factor prominently into residential property valuations. Closeness to markets, warehouses, transportation, and freeways also play important roles.
You should also consider the mid-to-long-term view of the area and how it is expected to evolve over the investment period. For example, today’s peaceful open land at the back of a residential building could potentially become a noisy manufacturing facility, which would diminish its value. One way to collect information about the vicinity of the property is to contact the town hall or other public agencies in charge of zoning or planning. This will give you access to long-term area planning and make a determination of how favorable or unfavorable your property will be.
6. Status of the Market
The real estate market can fluctuate and it pays to be aware of trends. It is also important to pay attention to mortgage rates so you can lower your financing costs, if possible. Stay up to date with trends and statistics for:
Home prices and home sales
Real estate investing can help you diversify your portfolio. With any investment, it's good to buy low and sell high. Real estate has a low correlation with other types of investments - when stocks are down, real estate is often up. A real estate investment can also provide steady cash flow, appreciation, tax advantages, and competitive risk adjustment returns, making it a sound investment.
Are you looking to get started in real estate investing? Learning from YouTube can be great, but there is a lot more to successful investing than YouTube can teach. At KeyGlee, we work with beginner and experienced investors to help them achieve their financial goals. As a real estate investment company, we have exclusive access to off-market properties that can help you get started or get you further than you are now. Check our exclusive properties here and find what you are looking for today!