One of the most popular types of investment is real estate. This is where you buy, own and proceed to manage a property with the objective of profit. Many people flock to invest in real estate. This is because the general trend of property is that it increases in value. As such, your returns are more or less guaranteed over some time.However, real estate has limited initial cash returns when compared to other forms of investment. It also requires intensive capital to begin and a high cash flow to maintain. It is important for you to understand these factors before you invest in real estate. In addition to those, here are 7 important elements to consider when investing in a property.
1. Check your Finances
Investing in property is going to take some capital investment, so you need to take stock of all your assets, your income and outgoings and work out how much you have available to invest.Speak to your accountant so you can get an accurate picture of your current financial situation. If you don’t have an accountant, choose one who already owns investment property and understands the journey you want to take.You can also talk to a bank or mortgage broker and get pre-approval on how much you are able to borrow given your current situation and circumstances. This will help you set a realistic budget and get some buying rules in place.You can also discuss whether you have any equity available in your home that you may be able to use to kick start your property investment portfolio.
2. Research The Location
Once you decide on the type of property you want to invest in, it’s time to choose the location. It is one of the most important factors affecting the value and profitability of your investment property. When selecting the location for your future rental property, make sure to consider the following factors:
Crime Rate. Research the crime rate in the area where you plan to invest. The lower the crime rate, the higher the rental demand and the rental prices.Employment Rate. The employment rate is another crucial factor to consider when selecting the location for your rental property. The higher the employment rate, the higher the demand for rental units and the higher the rental prices.School District. Families with children are usually willing to pay more for a rental unit located in a good school district. If you are planning to invest in a family-friendly neighbourhood, make sure to research local schools.Transportation. Good transportation links are another influential factor to consider when choosing the location for your rental property. The closer your property is to public transportation, the higher the rental demand and the rental prices.
3. Order An Appraisal
Once you have picked the location for your investment property, it’s time to order an appraisal. An appraisal is an estimate of the market value of a property.Ordering an appraisal before buying an investment property will help you determine whether the asking price is fair and whether the property is worth investing in.
4. Get a Home Inspection
In addition to ordering an appraisal, it’s also a good idea to get a home inspection before buying an investment property. A home inspection is a thorough examination of a property to identify any defects or problems.
Although a home inspection is not required when buying a property, it’s highly recommended because it will give you a better understanding of the condition of the property and will help you avoid any unexpected repairs or expenses in the future.
5. Determine Your Risks and Rewards
The biggest part of any investment deal is determining your potential risk and reward. Like with any major financial decision you must have a well thought out plan with each potential asset. As a first-time real estate investor, you must always ask yourself if the deal makes sense to you.Passive income is one of the more desired parts of being a real estate investor. You can focus more on your day-to-day job and still produce income from your assets. The downside is having to deal with difficult tenants yourself if you do not have the luxury of a property manager. Also, if you don’t have any tenants, you must pay all the expenses yourself.
Real estate values tend to remain stable, however, selling a property is not an instant process so it can be difficult to protect yourself when things turn out badly.
6. Stay Focused
Treat your property as a business and bear in mind it’s a long-term journey. Keep on top of the goals you want to achieve and the milestones you need along the way.
- Don’t assume you can do it all by yourself. Form a property investing team of people around you that can help.
- Don’t lose sight of the big picture. Regularly review your goals and when you have started investing, check on your portfolio’s fundamentals regularly. E.g. your equity, available depreciation, cash flow, rents, interest rates etc. to make sure you optimise your portfolio to its maximum potential.
- Don’t neglect your property. You may have what it takes to manage your own investment property but consider using a professional property manager.
- Create a realistic budget that factors in the running costs, repayments, rates, insurance etc of owning investment property and ensure you can meet them.
- Factor in a scenario of what would happen if the property were vacant for 2 – 3 months and ensure you have a contingency plan that can meet this cost.
- Falling in love with property, not the numbers. Always crunch the numbers before you invest, and treat your property investment as a business, don’t get sentimental about an investment property.
7. Build a Team
As a general rule for getting started in property investment, you should choose a property investing team of experts whose help you can call upon.This team will include accountant, lawyer/conveyancer, bank/mortgage broker, independent valuer, contractors (trades) and property manager.Property investment is a complex subject, but we hope this article will help you get to grips with some of the fundamentals and can go some way to help you decide whether it is a wealth creation strategy that is right for you.
Outsourced Properties is part of Outsourced ACC offering our clients bespoke property advice and guidance keeping financial growth and profitability in mind. Give us a ring today to find out more about how we can help you grow your portfolio value & rental yields.
written by Irina Stucere