Investing in real estate isn’t a ‘get rich quick’ game. While it’s true, some investors have profited nicely from fast turn-around deals, most investors play the long game, slowly and steadily building wealth through wise investments. The real estate business can be quite lucrative, but before committing finances, you need to do your homework. Investing in real estate takes hard work and dedication, along with the right knowledge to make wise investments. Before making an investment, here are a few tips to consider when evaluating a property:
Remember the adage “location, location, location” because in real estate, it’s THE most important factor in determining profitability in real estate investing. Things like scenic views, neighbourhoods, and proximity to amenities all factor into residential property valuations. In commercial real estate, things like proximity to transport hubs, freeways, closeness to warehouses and tax-exempt areas play an important role. Another key consideration before investing is the mid-to-long term view of how the area is expected to evolve over the investment period.
2. Property Valuation
Property valuation is important for financing the purchase. It is made up of the list price, investment analysis, taxation and insurance. All of this should be captured in a real estate valuation. Commonly used real estate methods include the sales comparison approach (comparable property sales), cost approach (cost of land and construction, minus depreciation), and the income approach (based on expected cash inflow-rent payments)
3. Purpose of Investment
What’s your purpose for making the investment? Are you planning to purchase property to live in or are you looking to invest in a rental property that offers regular income? Maybe you are planning to purchase a property to flip for a quick profit or maybe your vision is longer term. Having clarity about your purchase will help you avoid potential financial losses down the road.
4. Cash Flow & Profit Opportunity
After expenses, how much money is left? On investment properties, a positive cash flow is key to a good rate of return. Look at expected cash flow from rental income, expected increases due to long-term price appreciation, the benefits of depreciation (and any tax benefits), along with the cost-benefit analysis of renovations before sale or mortgaged loans compared to value appreciation.
5. Leveraged Investing
Most of us require loans to make investments in real estate, but those loans come at a cost. When you acquire a loan for your real estate investment, you hope to gain higher investment returns by using the borrowed money. Care should be taken to ensure that you don’t become over-leveraged and end up with a high debt obligation, which could be devastating in adverse market conditions. Investigate what type of mortgage will work best for you in your situation, whether it’s a fixed-rate, variable rate or another mortgage type. Pay attention to the terms and conditions of the loan and any other charges levied by the mortgage lender.
6. Existing Property vs. New Construction
While existing properties have things like landscaping, developed neighbourhoods and amenities, new builds often present an opportunity to get attractive pricing and a custom build. For older builds, review property deeds, appraisal reports and recent surveys. For new builds, look at past projects completed by the developer and get a sense of their reputation. If you are considering investing in leased property, make a point of checking into whether the property is rent-controlled or rent-stabilized.
7. Indirect Investment in Real Estate
Physically managing and maintaining property investments over a long-term isn’t for everyone. Thankfully, there are alternatives to investing in real estate that don’t require “sweat equity”. Consider investments such as Real Estate Investment Trusts (REITs), investing in real estate company stocks, real estate focused mutual funds (ETFs) or mortgaged-backed securities (MBS).
8. Real Estate Market Overall
What’s happening in the real estate market itself? Real estate markets fluctuate, so it’s important to pay attention to market trends, as well as mortgage rates. Review statistics on housing prices, property inventory, foreclosures and new developments.
Investing in real estate can diversify your financial portfolio. It can also provide a steady cash flow, tax advantages and competitive risk-adjusted returns. Much like any other investment, it’s critical that you consider all the facts before finalizing any investment decision. Talk with your financial advisor, real estate advisor or wealth management professional about available options that will work well based on your risk tolerance and financial goals.
Vexxit can connect you with experienced and reputable financial advisors, real estate advisors and wealth management professionals if you are in the market for one (or all) of these professionals.