Real estate is an encompassing term that refers to land, the buildings on that land, and its natural resources, such as crops and minerals. Compared to other types of investments, real estate investing has a relatively favorable risk/reward profile, but with relatively low liquidity. So if you want to think about property investment, ask yourself these questions before going ahead with real estate investing, so that the deal is a favorable one.
How to invest in property – your checklist
Where is the property located?
Location is still on the top of the checklist, for profitability in real estate. Amenities (schools, hospitals, malls, airports etc.), the neighborhood ranking, view from home, peace are some of the things that play major roles in residential property valuations. But if you’re looking to invest in commercial properties, check for proximity to markets, warehouses, transport hubs, freeways and tax-exempt areas.
But that’s not all. You have to take all these requirements and view it in the long term. Gauge how the locality is expected to evolve over the investment period. Your residential valuation will go down if today’s peaceful open environment is developed into a noisy manufacturing facility in the future. Your research should include a thorough check on ownership, type and intended usage of neighboring areas, establishments and free land in the locality.
What is the valuation of the property?
Real estate valuation includes a lot of things - real estate financing during purchase, listing price during sale, investment analysis, insurance premium and taxation.
There are 3 ways you can approach this.
Sales comparison approach: Compare sales of properties with similar characteristics. This can be done for both new & old properties
Cost Approach: This is suitable for newly constructed properties. To calculate this take the entire cost and minus the depreciation
Income approach: This is based on expected cash inflows and is suitable for rentals
What is the purpose and horizon of investment?
Real estate investing has low liquidity but high investment value. So if you lack clarity before investing, you might be entering the danger zone of unexpected financial distress, especially if the investment is mortgaged.
Like every financial venture, know what the purpose of your investment is.
Buy & self-use: To save on rentals, get benefits of self-utilization and value appreciation
Buy & lease: Go for this if you want a regular income & long term value appreciation. If this is your goal, prepare to become a landlord and all the responsibilities that come with it – to handle possible disputes & legal issues, manage tenants and repair work.
Buy & Sell (Short Term): If you’re looking for quick, but not-so-substantial profit, go for under-construction properties and sell them at a slightly higher cost once ready.
Buy & Sell (Long Term): If you’re looking at solutions for long-term aims like retirement planning, child’s education and such, opt for big value appreciation over a lengthier period of time.
What are the expected cash flows and profit opportunities?
Depending on the purpose and use of your real estate investment, your cash flow will be determined and hence, profit opportunities. Make a draft of your projections for various kinds of investments.
Expected cash flow from rental income - Inflation favors landlords for rental income
Expected increase in intrinsic value due to long-term price appreciation
Benefits of depreciation (and available tax benefits)
Cost benefit analysis of renovation before sale to get better price
Cost benefit analysis of mortgaged loans vs. value appreciation
What’s in a home loan?
Loans have hidden costs. You might precariously commit your future income to this investment and end up paying a lot of interest over many years. But if you understand the hidden costs and the risk involved, with meticulous planning you can benefit from this investment.
Be wary of these:
Decide on type of mortgage loans (Fixed Rate, Adjustable Floating Rate, Interest Only or Zero Down Payment), whichever suits you best
Be aware about the terms & conditions and other charges levied by financiers
Hunt around and bargain for a better deal - lower interest rates, lower insurance premiums or processing charges waiver, as possible
New Construction vs Existing Establishments for real estate investing
New constructions are available at smart pricing with the freedom to customize with the amenities you need. Risks include delay in possession, increase in costs, and lack of awareness of the neighborhood. But if you have pre-possessed properties in mind, do a thorough check on ownership, documents and legal matters.
You can mitigate risks with knowledge of the sector. Ask plenty of questions on real estate investing and hit the market armed with knowledge.
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