Many people ask what they should look for in the property or the real estate before investing in it. The property’s location is one of the critical elements to consider while buying a property; one should consider numerous other factors before investing in real estate. Here is the list of things you should consider while investing in the real estate market.
1. Location of the property:
“Location and location.” Location is the most critical aspect of any property and remains one of the top factors in the coming times. Because the location of the property directly affects the profitability while investing in real estate. Proximity to scenic views, greenery, amenities, and neighborhood status is vital in the residential property’s location. Closeness to transport, markets, freeways, warehouses, tax-exempt areas are essential for commercial property location.
What should we look for?
When considering the location of the commercial and residential property, one should consider how the place will expand and evolve over the period of time. For example, an empty lot in a residential area can be a peaceful land but can turn into a noisy facility which will diminish its value. That is why review the property’s location in the current and coming times too to evaluate its valuation and invest accordingly.
Tip: another way to collect information about the property prospects of the vicinity is by contacting the municipal, town hall, and public agencies about urban planning and zoning. It will help you understand the area planning in the long term and determine what things can become favorable or unfavorable for your investment.
2. Valuation of the property:
Property valuation is considered to be one of the crucial aspects of financing. It helps you understand that you are paying the fair price of the property according to the real estate market and the value of the property. The elements like listing price, insurance, taxation, investment analysis, and market value – depending on the real estate valuation.
What should we look for?
If you are an expert in real estate property valuation, you can do it by yourself but if not, take the help of the expert in this regard. There are many commonly used real estate valuation methods which are listed below:
- Sales comparison approach: compare recent similar sale properties with characters alike. Do this for both new and old properties. It is a simple technique that helps you understand the value of the property.
- Cost approach: the cost of the construction as well as the land. Minus the depreciation cost, and you will get the valuation of your property of the new construction.
- Income approach: evaluate the expected cash inflows from the property, which is ideal for the rentals.
3. Purpose of investment and its horizon
It is essential to understand the purpose of the investment and its horizon in real estate because factors like liquidity, investments’ value can lead to unexpected outcomes and financial distress. Therefore, it is equally essential for you to understand why and where you are investing in the real estate market.
What should you look for?
It would help if you considered the following categories before investing in planning accordingly.
- Buy and use: if you plan to buy a property and use it yourself, you will save on rent and get the self-utilization benefit. It also appreciates the value of your property.
- Buy and lease: it allows you to have a long-term appreciation of property value and the benefit of regular income. The landlords have to deal with some related factors like legal issues, repair work, tenants management, and any possible disputes.
- Buy and sell in the short term: this type of investment is made for quick and small to medium profit rates on the property under construction and can be sold once completed.
- Buy and sell for the long-term: this is used for a long-term investment where the investors want to generate good profit in the long run, typically for retirement purposes.
3. Expected profit and cash flow:
Cash flow is considered to be one of the influential factors while investing in any property. It refers to how much money is generated once all the expenses are minus. Positive cash flow is essential to get a reasonable rate of return while investing in any property.
What should we look for?
We need to project the following modes of expenses and profit:
- What is the expected cash flow from the rents? The inflation favors the property owner or the landlords for the rental income.
- Expected increase in the property value because of the long-term appreciation of the property price.
- Calculate the Benefits of property depreciation and its effects on the tax.
- Cost-benefit analysis of renovating the property before selling to get a higher/ better price.
- Calculate cost-benefit analysis of value appreciation vs. property loans.
4. Existing property vs. New construction
The newly constructed property is usually offered in attractive pricing, modern amenities and technologies, and customization choices according to the customer demand. But some risks can occur like increased costs, delay in possession, and unknown factors of the newly developed neighborhood.
On the other hand, the existing properties offer faster access, convenience, established improvements like near markets, utilities, etc., and many times lower costs.
What should we look for?
Review these things when deciding to invest in an existing property or new construction:
- Review the construction company’s past projects
- Along with its reputation when it comes to investing in its new construction.
- Check the recent survey, market reputation, appraisal reports, and property deeds of the existing property.
- Also, consider the outstanding dues, taxations, and monthly maintenance costs that severely impact the cash flow.
- Consider the elements in the leased property and find out if it is rent-stabilized, rent-controlled, or based on the free market. When is the lease expiring? Are the lease renewal options being in tenant favor? Who bears the furnishing cost?
- Always check what is included in the sale and the quality of these items like equipment, fixtures, and furniture.
