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5 Essential Factors To Consider Before Investing In Real Estate
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“Real estate is one of the most attractive investments as it lets you grow your capital over time and build a rental income source,” said Joe Williams, a real estate investor, during an interview. “Huge returns make this a more attractive option than stock markets, but it is subject to risks as well.” Real estate market is illiquid. Economic factors influence the demand and supply network. Most investors find it easier to block their money in property, but they struggle to get it out of it.
First off, you should know the property type you want to invest in. There are several types of properties you can think of investing in.
• Buy to let property – you purchase a property to rent it out. The purpose is to create a fixed-income source.
• Property development – you buy an old dilapidated or ramshackle building and revamp it to sell it.
• Building a new build – build a new building from scratch to sell it at profits.
“There is no doubt you should have a lot of money to start investing in real estate,” said Joe Williams. “Buy-to-let mortgages, commercial mortgages and property ...
... refurbishment loans are some financing options you will need depending on the type o property you invest in.”
5 essential factors to consider before investing in real estate
Now that you know it is vital to know the property type and type of finances you will need, but there are some other factors you need to pay heed to.
• Property location
Proximity to amenities and green space is extremely important to consider while buying a property. Whether you are buying a residential property or a commercial property, make sure to check markets and transport hubs in the particular area.
Your tenants will take into account these factors. If the neighbourhood does not have such amenities, people will be put off. You will also have difficulty selling your property as buyers may find that it a doomed project.
The location you choose for your property can influence your long-term returns. Find out how the area is expected to evolve during the investment period. it is possible that open land at the back of your residential building could be a manufacturing unit in years to come. It will diminish the value of your property. In fact, tenants will be hesitant to rent out your property.
• Investment purpose
Your investment will depend on your financial goals. It is paramount to choose an investment that aligns with your financial goals especially if it is to be mortgaged. “If your goal is to generate rental income, a buy-to-let property will be an ideal investment,” said Joe. “Depending on your financial capacity, you will choose between a commercial property and a residential property.”
He further said that if your goal is to gain benefits from a long-term appreciation in the value of your property, property development will be a better investment. “This kind of investment is quite popular among builders and realtors who pool money together with other investors to build or revamp an old building and then sell it at profits.” This is how they make money and get out of the market.
• Profit opportunities
There must be a positive cash flow to earn maximum return from your investment. for instance, inflation will favour you for rental income. As the living cost rises, you can revise your rent. You will stay safe against the inflation.
Do you expect a rise in the market value of your property? Make sure to choose a property that seems to be appreciating in coming years. See if you can get tax benefits against depreciation. Compare the benefits against the cost of your mortgage. Your returns must be higher than the cost of your property. The cost of your property is the cost of your mortgage and maintenance and insurance.
• Your credit score
You might be wondering why your credit score is essential for investing in real estate. “Your lender will peruse your credit score before approving your mortgage,” said Joe Williams. “Commercial mortgages are more expensive than residential mortgages and they also require a higher deposit.”
Your credit score should be good to avail yourself of lower interest rates. Bad credit mortgage borrowers will not only get an expensive deal but they will also have to put down a larger down payment.
Here is how you can maintain your credit report in a good condition:
• Pay bills on time. Set reminders or use auto debit mode.
• Keep your credit utilisation ratio as low as 30%.
• Debt-to-income ratio should not be more than 25%.
• If possible, you should not owe any debt at the time of applying for a mortgage.
• Review your credit report and dispute for any inaccuracies and errors.
• Limit requests to avoid hard credit inquiries.
Do not underestimate the importance of having a good credit report. “The mortgage cost can influence the benefits and returns you will earn through your investment,” said Joe.
• The condition of real estate market
Study the real estate market in the location where you are looking to buy a property. Check the home prices and compare them with other locations. Find out the reasons for variation in prices. Monitor the selling trend. Some locations do not have as much sales as other areas. Your money will be blocked if you end up with a property that does not have potential buyers.
Study flipping activities and foreclosures and evaluate if new constructions have more demand than existing properties. Mortgage rates also vary by locations. Make sure the deals are not so expensive.
The bottom line
Real estate market is very propitious, but it should be thoroughly studied before investing money. Real estate can provide you with long-term benefits, but it is subject to risks as well. Set your investment goals and accordingly choose an investment property. Choose a location where properties have high liquidity ratio.
Keep your credit score good because it will enable you to get a mortgage at a lower interest rate. You can also consider low-cost real estate investments like REITs to dip your toe in the water.
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