One of the most popular and rewarding types of investment in real estate is where you buy, own and manage a property with the objective of gaining a profit. Most people don’t think twice about investing in real estate since it’s been demonstrated that property values will increase significantly over time. However, before jumping on the bandwagon, as a new property investor, it’s much better to educate yourself and fully understand the responsibilities and opportunities of investing in different kinds of real estate before moving forward.
Here are five factors to consider before making any investment decision.
1. The Type of Property You Want To Invest In
In the world of real estate, you basically have 4 main type of property investment opportunities – commercial, retail, industrial and residential real estate. Residential real estate is often thought of as one of the safest property types to invest in.
Why? Well, one of the basic needs of human beings is shelter. People will always look for a place to live. Therefore, you should always be able to find tenants for your residential property. The only downside is that residential real estate comes with a lower profit margin than the rest of the property types.
Industrial, retail and commercial properties provide a more significant profit margin. But they also offer a much higher risk of no payment or vacancy during tough economic times. So, it is crucial that you know which type of property you wish to invest in when you consider your next real estate venture.
2. A Stable Personal Income
Real estate investment can come with a huge financial commitment. Initially building up a highly financed investment portfolio can take more from you than it gives back. Therefore, you should make sure that you have a stable income to fall back on during any challenging economic or financial period.
Moreover, you need to make sure you have enough surplus cash to cover any uncertainties that could arise. As a general rule of thumb, you need to make a financial projection for the next 6-12 months and ask yourself if your income will cover all your personal and investment expenses during that period? If yes, then, congratulations! You are financially fit to make an investment in real estate. If not, you might need to work on your finances first.
3. Characteristics of the Property
The characteristics or the condition of the property that you intend to invest in is a crucial factor to consider. Attractive houses and properties in highly desirable locations with excellent layouts, open floor plans and top amenities like barbecue areas, balconies, outdoor patios, and gardens are very important. Features that can attract or detract from the rental or leasing desirability of a real estate investment are the top characteristics to consider.
For instance, a house with structural problems or a backyard with maintenance issues like a garden filled with pests can turn off tenants and will make it hard for you to rent or lease. In such cases, you can still consider purchasing the property but make sure to take these factors into account with any potential offer. For small items like a pest problem you’ll have to factor a budget into your calculations and hire a pest control company afterwards to take care of the problem.
4. Location, Location, Location
It has been and always will be about location in the world of property investment. The location of your property is probably the most important and critical single element to consider. So, always perform thorough research on the area where you are planning to invest in.
Is the area safe? Are there any commercial centers located near it? Are there transportation hubs around? How about some education centers? You need to consider all these and more before investing in a property in any location.
5. The Type of Tenant
Commercial, industrial and retail real estate investment usually comes with established leases in place, so it’s more of a numbers game with projections and forecasts to fall back on. Hiring a professional broker or company to assist with any potential purchase is often the key to helping you make an informed investment decision.
Unfortunately, with most residential real estate, investors make the mistake of not taking into consideration the type and quality of tenants they will attract prior to making any investment decision. Most often they will just settle with anyone who pays the rent. But there is much more to renting out a property than just placing a for rent ad. You will need to find tenants with good rental background, so take your time to do thorough interviews and background checks before allowing them to move into your new property to ensure a problem free investment.