What is the most important factor to consider when buying real estate? Location is important, but there are many other factors to consider when deciding if a real estate investment is for you. Consider these important factors if you’re planning to invest in the real estate industry.
Investopedia / Alex Dos Diaz
- Property Location
Why it’s important
Location, location, and location is the key to real estate investment success. The proximity to amenities and scenic views heavily influence residential property values. The proximity to markets, warehouses, and transport hubs influences Commercial Property values.
What to Look for
When deciding on the location of a property, it is important to consider the long-term outlook for the area. Today’s quiet, open land behind a residential property could become a noisy factory in the future, reducing its value. Review the ownership and intended use of the immediate area where you plan to invest.
Contacting the local town hall or any other public agency responsible for urban planning and zoning is a good way to gather information on the future of the area of the property that you are interested in. You can then access the long-term planning for the site and determine if it is in your best interest to purchase the property.
- Valuation of Property
Why it’s important
The value of a property is crucial for many reasons, including financing, taxation, insurance, and listing prices.
What to Look for
Some of the most common methods used to value real estate include:
- Sales comparison approach: recent comparable sales of properties with similar characteristics–most common and suitable for both new and old properties
- Cost Approach: The cost of land and construction minus Depreciation — suitable for new construction
- Income Approach – based on cash inflows expected — ideal for rental
- Investment Objective and Investment Horizon
Why it’s important
A lack of clarity in the purpose can lead to unexpected outcomes, such as financial distress, especially if the real estate investment is mortgaged.
What to Look for
Plan according to the broad categories that best suit your needs:
- Rent and buy. You will get the benefits of renting and saving money, as well as self-use and value appreciation.
- Lease and buy. This provides a regular income as well as long-term appreciation in value. Landlord temperament is required to manage possible legal issues and disputes, manage tenants, do repair work, etc.
- Buy-and-sell (short term). This strategy is for quick and small-to-medium profits. The typical property will be under construction and then sold at a gain upon completion.
- Buy-and-sell (long term). This focuses on large intrinsic value appreciations over a long period. This is a way to complement long-term goals such as retirement.
- Cash Flows Expected and Profit Opportunities
Why it’s important
Cash flow is the amount of money left over after all expenses. A positive cash flow is essential to getting a high rate of return from an investment property.
What to Look for
Create projections of the following types of expenses and income:
- Rent income expected ( inflation is in landlords’ favor)
- Price appreciation over a long period is expected to increase the intrinsic value.
- Tax benefits and Depreciation
- Analyze the cost-benefit of renovating before selling to obtain a higher price
- Analysis of the cost-benefits of mortgaged loans and value appreciation
- Use Leverage with Care
Why it’s important
The convenience of loans can come at a high price. You are committing your future income for utility today at the expense of interest that is spread over many years. Avoid high debt levels or over-leverage. Over-leverage can be a challenge for real estate experts, especially in periods of poor market conditions. The lack of liquidity and high debt obligations are enough to break real estate projects.
What to Look for
Consider the following based on your current earnings and future expectations:
- Decide on the type of mortgage that best fits your situation–fixed-rate, adjustable-rate mortgage (ARM), interest-only, zero down payment, etc. Each type of mortgage comes with its own set of risks, so you should carefully study them. For example, an ARM mortgage rate can be changed at any time by the capital markets, and the borrower is required to accept any changes in the rate during the loan period.
- Know the conditions and charges imposed by your mortgage lender.
- Compare rates and terms to find the lowest rates.
- New Construction vs. Existing Property
Why it’s important
New construction offers attractive prices, customization options, and modern amenities. The risks include delays, higher costs, and an unknown neighborhood.
Existing properties provide convenience, quicker access, and established improvements (utilities or landscaping, for example). In many cases, existing properties are cheaper and offer comfort.
What to Look for
When deciding whether to buy a new property or an existing one, here are some things you should consider:
- Research the reputation of the company and its past work before making any new investments.
- Examine property deeds and recent surveys for existing properties.
- Take into account monthly maintenance costs, taxes, and outstanding dues. These costs can have a significant impact on your cash flow.
- Find out whether the property is rent-controlled, rent-stabilized, or free-market before investing. The lease is about to expire. Are options for renewal advantageous to the tenant? Who owns the furniture?
- If you plan to include furniture, fixtures, and equipment in your sale, make sure that they are of good quality.
- Indirect Investments in Real Estate
Why it’s important
Managing real estate on a long-term basis is not for everyone. There are other ways to invest indirectly in real estate.
What to Look for
Other ways to invest in Real Estate:
- Real estate investment trusts (REITs)
- Real estate company stocks
- Mutual funds and ETFs that focus on the real estate sector
- Mortgage bonds
- Mortgage-backed Securities (MBS)
- Your Credit Score
Why it’s important
Credit score impacts your ability to get a mortgage and the terms that your lender will offer. You can get better times if you have a high credit score. This can result in substantial savings.
Mortgage lending discrimination can be illegal. You can take steps if you believe you have been discriminated against on the basis of race, religion, or sex. You can file a complaint with the Consumer Financial Protection Bureau (CFPB) or the U.S. Department of Justice. Department of Housing and Urban Development.
What to Look for
If you want to qualify for the best mortgage, a score of 800 or more is considered excellent. If you need to, improve your credit score.
- Set up automatic payments to pay your bills on time
- Reduce debt
- Credit utilization should not exceed 30%
- Close unused credit cards only if you don’t pay annual fees
- Limit the number of “hard” credit inquiries and new credit requests
- Review your credit history and dispute any inaccuracies
- Overall, Real Estate Market
Why it’s important
It’s a good idea to buy low and then sell high, just like with any other type of investment. It pays to keep up with trends in the real estate market. You should also pay attention to the mortgage rates to lower your costs if you can.
What to Look for
Keep up to date with the latest trends and statistics about:
- Home sales and prices (both in general and your chosen market)
- New Construction
- Property Inventory
- Mortgage rates
- Flipping activity
- Foreclosures
The Bottom Line
Real estate is a great way to diversify your portfolio. Real estate, in general, has a low correlation to other major asset classes. So, when stocks are down, real estate often goes up. Real estate investments can provide a steady cash flow and substantial appreciation. They also offer tax benefits, competitive returns, and risk-adjusted returns.
Before investing in real estate, you should consider the factors listed below.