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Investing in the real estate market is a huge decision, but when done correctly, you can make a killing in this market. Similar to any other investment vehicle, there’s a right and wrong way to spend your money.
Here are six things to consider when making a real estate investment.
What to Consider Before Making a Real Estate Investment
A wide variety of factors determine when an investment is the “right” choice, but it’s essential to brush up on the market and real estate terminology before entering this market.
1. Property Location
Location is the most important determining factor when it comes to choosing a real estate property. A property’s proximity to parks, amenities, and schools can lower or drive up the price of any suburban location, while closeness to bus stops and markets is important for cities.
It’s a good idea to research what the neighborhood may look like in the next few years, not just currently. If it’s a new neighborhood, families may avoid the area due to construction. Contact town hall or a public agency in charge of urban planning before making a decision.
2. Property Valuation
The valuation of a property includes the total costs of the property and is critical for determining a listing price, insurance, taxation, and investment analysis. For homeowners, property valuation determines how much property tax and insurance they have to pay.
For investors, the valuation of a property can help determine how much they can charge for rent to break even (income approach) or how much the property will sell for at a later date (sales approach). Investors could also take a cost approach, which totals the construction cost.
3. Profit Opportunities
Unless you’re buying a property to live or work in, you should consider your profit opportunities before the purchase. Any positive capital indicates a great ROI, but if you want to maximize the rate of return on your property, you need to calculate your expected cash flow.
While your profit opportunities depend on what you’re using the property for, you can develop a projection based on expected cash flow from rental income or the expected increase in intrinsic value. Be sure to factor in cost benefits, like tax write-offs and depreciation credits.
4. Investment Purpose
Real estate is low on the liquidity scale, which makes any investment in the market a substantial risk. Without factoring in why you want to hold on to a property, you won’t know when to sell it if the market starts to dip. You may suffer from financial distress or unmanageable results.
Most landlords will buy and lease over the long-term, but you can buy a property for self-use (summer home or partially owned). Flippers will often buy and immediately sell their property, while large-scale investors will hold on to an empty property over the long term.
5. New vs. Existing
Buying land to build on can be an attractive option if you want to customize the property, but you’ll have to pay an increased upfront cost. In new neighborhoods, construction is a huge risk because you can’t determine what the surrounding area will look like in a few years.
Existing properties are convenient, established, and often sell at a lower cost. While that may mean they’ll depreciate at a faster rate than a new build, that isn’t the case with historic homes. Consider maintenance costs, appliance quality, and furnishings for new and existing properties.
6. Overall Market
The real estate market isn’t likely to collapse any time soon because you’re buying and trading a necessity. Everyone needs a home to live in, and businesses will always need a headquarters. Still, the market can shift and dip over time, so make sure you keep an eye on current trends.