Real estate investments are a great option for those looking for long-term financial security. Real estate is tangible and physical, which makes the owner comfortable investing, and is something that most people understand better than other investment options.
Buying a piece of real estate is one of the biggest financial commitments that one will make in his or her life. Interest rates are favorable and the pall of gloom surrounding the industry has finally cleared. But if you are looking to invest in a home or commercial property there are several things you need to give serious thought to.
Investing in property makes you vulnerable to the ever-changing and volatile real estate market. Things are still hazy and you cannot really predict how things will pan out in the coming years. There are a lot of factors affecting the price of real estate including interest rates, income levels and global economic recovery. So you have to be careful before betting your money on a new apartment, condo or shop.
Let’s see how you can go about getting it right with your real estate investment.
What You Need to Consider
Real estate gives a healthy balance to your investment portfolio.
Taking money out of valuable liquid assets and investing in real estate is a big risk. You need to ensure that you earn as good a dollar to dollar return and avoid losses.
This can be possible only if you carry out a comprehensive due diligence of the real estate you intend to purchase including its rental and price appreciation potential, the quality of school district (it matters a lot when you are selling) and the expected housing development that will happen in the area. Commercial real estate needs to be evaluated on suitable parameters.
Your knowledge of real estate market affects the profitability and viability of the investment.
Decide on the Kind of Property You Want to Buy – Commercial or Residential
If you are a starter in real estate investing then rental property is the way to go.
There are two types of properties you can consider – commercial or residential. Both have their own benefits and drawbacks, and you need to analyze which one will suit you the best.
Residential properties are convenient as direct investment vehicles, especially for first-time investors. It is much easier to gauge market value and selling rates of houses from market activity in a given area. You can also assess potential rental income from your investment.
It is harder to assess market potential of commercial properties, especially if you are not knowledgeable of commercial real estate market. Prime commercial real estate in business and corporate hubs, shopping centers and industrial areas is very expensive. Large properties cost millions of dollars and are not for everyone. The best way to get a share of prime commercial real estate pie is through collective investment schemes.
What Are the Prospects of Leasing out Your Property?
There are many expenses that you will incur while maintaining properties and they differ for commercial and residential real estate.
Maintenance and upkeep costs are typically borne by landlords in the case of residential properties, whereas for commercial properties tenants bear them.
If you are planning to buy a residential property for rental purposes, ensure that it is in the best possible condition. Many investors find that maintenance costs eat into almost 30% of rental income. Also look into the insurance clauses and laws applicable in your state, and your liabilities.
Lease agreements also differ in the case of commercial and residential properties. Commercial properties are leased out for a long term, usually five years and above. As a result of shorter lease periods residential premises often report a higher level of voids.
In commercial property lease agreements reviews have ‘upward only’ clause which means that tenants cannot demand rents to be decreased. Rental values can only go up after reviews.
Residential lease reviews sometimes lead to lower rents. Rentals reflect prevailing comparable market activity and can decrease if the rental market is in a slump.
Plot Your Exit Strategy in the Beginning
Location is the most important factor influencing real estate value. The steepest value appreciation happens when you buy a property when nobody wants it and sell at a time when everyone wants to grab it.
Rental properties are valuable income-generating assets whose value increases with time. If and when you choose to sell it, you get a price several times what you paid for.
Many real estate investors are flippers. That is they buy properties, hold them for short periods usually less than a year, and then sell them at a profit. But this is a risky business because if the market slumps, you will not be able to sell the property at a profit or worse, even find a buyer.
If you are buying real estate purely for investment purpose, ensure you have a practical and profitable exit strategy in mind. This is not as easy as it sounds and you would do well to take an advice of real estate investment advisors.
Property Development Is Not Everybody’s Cup of Tea
Property development is the new buzzword for getting rich quick. But it is a high-risk affair where you would probably never see the money you invest ever again. There are several legal tangles and hoops you need to jump through, and it takes expert planning and documentation to get projects started.
You will also have to deal with several intermediaries like builders, contractors and marketing specialists. You need entrenched market experience to play the market dynamics and price your offerings right. So unless you are sitting on a pile of idle millions in cash, property development is not for you.
You can also buy properties that are in poor condition, fix them and sell them at a profit. Fixer-uppers yield good returns, provided you invest wisely. Invest small and avoid high-risk deals. If you are not sure of the potential damage to the structure and the repairing you will need to do, get a professional to evaluate the property. You also need to hire quality workers and make safe, long-lasting and aesthetic improvements to get the desired profit.
Investing in real estate requires money. If you need mortgage, go for a long-term, low-down payment option that will free up cash for investing in equities and bonds. This will help you achieve a dynamic and varied portfolio, with healthy returns.