10 Factors to Consider Before Making a Real Estate Investment
Real estate is a popular type of investment; it entails buying, owning and managing property for the sole purpose of making profit. Though real estate offers profit when it appreciates in value, it is capital intensive and requires a huge cash flow to maintain. This article focuses on the factors to consider before investing in real estate.
Identify the Type of Property You Want to Invest in
The main types of real estate property include residential, commercial, retail and industrial real estate. Residential real estate is the safest type to invest in because the rate of return is guaranteed. Shelter is one of the fundamental human needs and people always need houses to live in. The downside, however, is that residential real estate has a lower profit margin when compared to the other real estate types. Retail, commercial and industrial properties all offer a higher profit margin. Before you venture into property investment, you must know the type of real estate you want to invest in.
You Must Have a Stable Personal Income
Real estate investment requires financial commitment because it is capital intensive. At the start, the expenses may outweigh the profit. That is why you need a stable source of income to fall back on in the rocky times between purchase and sale of a property. Try making a financial projection of the next six months of your life. If your income will be stable during this period, then you are financially prepared to make a real estate investment.
How Much Money Do You Need for a Real Estate Investment?
You need to have a substantial sum of money not only to purchase but also to maintain property investments before selling them. Most times, you will need to do some renovations on the property before selling it. You might also need to pay its mortgage if the property you plan on investing in is in foreclosure. Hence, one of the key elements to consider before venturing into property investment is how much money you have available. You need access to a huge sum of money to tide you over till you are able to make profit from the sale of your property. An investment loan from a bank is a good way to get money.
Your Current Credit Score
The type of mortgage which you get depends on your personal credit score. This is a crucial element that affects the interest rate for your mortgages. The difference of a few points on your credit score will make a huge difference in your mortgage. So, you must make sure that your credit score is favourable before you take a mortgage as part of investing in residential real estate.
Pick the Right Mortgage Plan
The adjustable rate mortgage the best option if you plan on flipping a property after holding it for a short time or if you plan on living in it for a short period of time before selling it. The initial rate for this type of mortgage is low and fixed for half a decade. It is then adjusted and increased afterwards. Also, the adjustable rate mortgage is cheaper than the fixed rate mortgage. You can invest in a property, using an adjustable rate mortgage and then flip the house before the first adjustment. This way, you will earn a good return. On the other hand, the fixed rate mortgage is advisable if you plan on making a long term investment.
Location is a huge factor in real estate investment. The most important element to consider is the location of your investment. Your research concerning the area where the property you intend to invest in is located has to be thorough. You need to know if it is safe and easily accessible. You also need to find out its proximity to basic infrastructures like schools, banks, hospitals and so on. All these factors need to be considered before you invest in a property.
The Features and Characteristics of the Property
Another important factor to consider is the condition of the real estate investment you intend to make. Functional street lights, good drainage systems and well-paved tarmac roads also fall under this category. The layout, structural integrity and accessories, such as balconies and outdoor patios are features to search for when making a real estate investment. This is because the availability or absence of these features can attract or repel tenants. It is advisable to choose the properties with these features as they fetch handsome rewards.
View Things from the Perspective of a Prospective Tenant
You will have to see things from the perspective of a tenant-to-be if you are developing real estate for rent or sale. You need to know what they would find attractive, then implement it in your development plans. You should also find out the marital status of your prospective tenants and customize your plans to suit them.
Type of Tenant
Many real estate investors fail to focus on the qualities they want in tenants. Rather, they focus only on who pays their rent on time. Yet, the type of client you accept is equally important. You should focus more on their background and qualities, such as maturity, discipline and honesty. A good way to find this out is by conducting an interview before you rent out the property. This goes a long way in ensuring that your arrangement is as problem-free as possible.
The Current State of the Real Estate Market
The state of the real estate market is seasonal and changes from time to time. Whether you are buying or selling is also another factor to consider. If you are selling real estate when property prices are high then it is an advantage, if you are buying, on the other hand, then you will be at a disadvantage. However, it will be the other way round if property prices are low. Factors like inflation also influence the state of the real estate market. The trick is to perform proper research in the area where you want to invest.
In conclusion, real estate or property investment is a lucrative source of income and a great opportunity for financial gain. However, a wrong move can land you in debt; that is why it is important to follow the advice outlined above. Speaking with a real estate or finance expert is also a great way to find out if the investment you are about to make is a viable one.