Have you ever considered property as an investment but aren’t sure where to start? It’s arguably one of the oldest investments that has ever existed, yet even today it’s highly unpredictable and volatile. If you’re looking into real estate or property as an investment, checkout our guide below to help you get started.
Buying Real Estate
Once you have determined your investment goals and risk appetite, deciding which property to buy is perhaps the most important aspect of investing in real estate. Unlike other investments such as bonds or stocks, every piece of real estate is different. Spotting a good property is as much art as it is finance. Hiring a surveyor to assess the real estate value is certainly a smart move, however keep in mind that two surveyors could provide you with vastly different valuations. You could also take a look at market listings of similar properties in comparable areas to get an idea about how much to pay for your purchase. Research for a good real estate attorney and make them your best friend. Laws regarding land and property can be complex at best and overlooking something in the beginning can end up being very costly later on.
Holding Real Estate
Congratulations! You’ve made your investment. Now, how do you get it to make money for you? As an investor, you will incur costs like maintenance charges, taxes, insurance, utilities, mortgage payments etc. The amount you charge your tenants must be enough to cover these costs and make some additional income for you. A commonly used metric for assessing the performance of real estate is the capitalization rate. Capitalization rate is net cash flow taken as a percentage of your purchase price. Net cash flow is the total income you receive from the property minus the total expense you incur. Monitoring this simple ratio can help you decide how to manage your income and attain your target return, on a consistent basis.
Selling Real Estate
In addition to rental income, capital appreciation is the best way to realize high returns on your property. Capital Appreciation is the changes in market value of your real estate over time. If your property’s market value has appreciated considerably, you are probably considering selling it at the larger price than what you purchased it for. Once again, get assistance from an attorney. The laws and regulations related to selling investment property can be overwhelming. More importantly, do your due diligence on why the value has increased. Has the value risen due to fundamental factors such as the quality of the region, new businesses etc. or is it driven up by speculation by uninformed investors? Knowing the answers to these questions can help you avoid getting caught in a real estate bubble and get the maximum gains from selling.
What to watch out for
Being aware of and managing the risks associated with real estate should be an inherent part of your investment strategy. External factors like market demand, economic crisis, political issues and government regulation can have a huge impact on your property. Regulations may put a limit on how much rent you can charge, while interest rate changes may push your mortgage and maintenance costs up. Therefore, always be sure to maintain sufficient cash flows to withstand these market changes and invest based on the quality of the property as opposed to short term market speculation.