Buying an investment property is pretty much the holy grail of adulthood. Beyond the true satisfaction of owning your own home, investing in real estate is also hugely beneficial for financial stability. Investment properties can be used as collateral for loans, or as sources of passive income. All-in-all, an investment property can be a great asset.
However, things can also go wrong. With insufficient information, investment properties can end up becoming reasons for stress and strain. That’s why, before even considering purchasing a property for investment purposes, there are a few important factors you should take into account. It’s a big life decision, so it’s important to come prepared. Here are 5 things you should know before investing in property:
You Need To Know The Clear Purpose Of Your Investment
When you invest in property, you’re looking to fulfill a very specific set of results. This could be selling your home for double the value you bought it for in X amount of years, or even saving it for retirement. You could also want to rent it out. These purposes have very different requirements, so it’s really important that you’re able to determine what you want to achieve with your investment before you dive into the process.
Ask yourself whether you plan to:
- Buy and self-use, so that you can save on rent whilst still getting value appreciation throughout the years
- Buy and lease, so that you can benefit from regular income and value appreciation
- Buy and sell for profit, once you’ve renovated the property
- Buy and sell over a long period of time, once the value has increased
Once you’ve determined your purpose, you’ll be able to determine whether you’re looking to buy industrial, residential, commercial, or retail property.
It Takes A Lot Of Research To Know The Market
It’s one thing to know your goals, it’s another to have a firm grasp of your ideal market’s conditions. You don’t want to find yourself in a situation where you bought for well-over market value – knowledge is power, especially in real estate.
Property valuation takes into account many factors. When you’re considering a property, pay attention to views, surrounding green space, proximity to amenities, the neighborhood’s status, closeness to markets, transport, amount of noise, etc. There are heaps of circumstances that could affect the true value of a property. Make sure you’re aware of them so you’re not overpaying. It’s also important to research similar properties’ prices in the area, to assess whether or not the property you’re interested in has coherent pricing.
Tip: Research the long-term planning plans of the area by contacting the relevant zoning and urban planning public agencies to find out if there could be anything affecting – positively or negatively – the property’s value in the near future.
You Need To Be Realistic About Budget And Cash Flow
Those who have made real estate investments before will probably tell you that it always costs more than expected. This means that it’s of prime importance to be realistic about how much you can afford. Spend time assessing your current financial situation: commitments like bills, debts, current mortgages, and others. Be honest with yourself about what you can really afford to spend on an investment property. It will help you get higher returns on your investment down the road.
Cash flow refers to how much money is left over after bills and expenses. This is what you should focus on when assessing whether or not an investment is profitable to you. If you’re planning to rent out the purchased property, find out the expected cash flow from the rental income and calculate cap rate. You could consider an expected increase in cash flow through price appreciation, including the analysis of renovation if needed. There’s also the consideration of mortgaged loans as opposed to value appreciation. The more you factor into the equation, the better informed of a decision you’ll be able to make.
Liquid Assets Vs. Mortgage
Experts say it’s better to purchase through a loan than use your liquid assets when purchasing a property. However, loans can definitely be an added risk. Though they’re convenient, they can come at a big cost when they put borrowers in a situation of debt. To avoid this, you should make sure you’re calculating the right type of mortgage for your needs. There are different types of mortgages you can choose from depending on your situation:
- Adjustable-rate mortgage (ARM)
- Zero down payment
- And more.
Each mortgage type is associated with its own risk profile, which is the amount of risk you incur when borrowing. For example, ARM mortgages are dependant on capital market forces which makes them susceptible to a sudden change at any given time. As a borrower, you could be forced to accept abrupt fluctuations in interest rate changes during the term of your loan. Make sure you’re always fully aware of all the terms and conditions set out by your lender and don’t hesitate to look around for better options.
There Are Other Ways To Invest In Real Estate
Picture yourself managing a property over time. You’ll have to deal with demanding tenants, exhausting repairs and plumbing issues in the middle of the night, chasing rent payments every month, and many other issues. Maybe the prospect excites you, and it’s worth the investment for you, but if not, know that there are other options. If you realize you don’t have thhe time or energy to manage a rental property, that’s fine – you can still invest in real estate. There is such a thing as indirect investments.
Real Estate Investment Trust (REIT)
You could invest in real estate investment trusts, which are companies that own, operate, and finance real estate. REITs pool the capital of numerous investors that will in turn earn dividends from their investments, without the hassle.
You could also invest in:
- Mortgage bonds
- Real estate company stocks
- Real estate mutual funds and ETFs
- Mortgage-backed securities (MBS)
The bottom line
Nothing can guarantee whether or not it’s the right time for you to invest in property. However, with a sufficient amount of research and the right information in your hands, you can make sure you’re taking a pretty educated guess at making the right investment. Professional property investors usually spend the bulk of their time researching the market and assessing whether or not to invest. The right option for you is out there – you just need to find it.