If you’re considering a real estate investment over a stock market investment, we highly recommend you choose real estate! When looking into this investment you may frequently hear the advice to check the location as a primary factor. However, there are other critical factors to be weighed in when evaluating if the investment is right for you.

Check out the following factors to determine if you’re investing in the best real estate:

Property Location

Location is always important when assessing a real estate investment. You want to be sure you’re choosing the best neighborhood for your investment property. You want to review the amenities, scenery, proximity to parks, and neighborhood when evaluating a residential property.

As for appraising a commercial property, you’ll be judging it on its distance to transport hubs, freeways, warehouses, and tax-free areas.

Before investing in a property, it’s good to think about the long term benefits of the neighborhood. If you purchase a property and a few years later, several infrastructures are laid out nearby, then this increases the demand for your rental.

Having an idea of how the area around your property will be used later on can help you judge whether its value will increase or decrease in the future.

You can start by visiting the local town hall or other agencies responsible for urban planning. Gaining information ensures you make the best decision in selecting a property to invest in.

Real Estate Valuation

Being aware of real estate valuation is vital for funding. A lot of factors such as property price, purchase price, insurance, taxes, and investment analysis are impacted by real estate valuation.

people shaking hands in front of a sold sign

Here are the most common methods utilized for real estate valuation:

  • Sales comparison approach: review the recent real estate sales of units with similar characteristics to yours. This applies to both old and new properties.
  • Cost approach: take into account the land price and construction cost less the depreciation. This applies to newly constructed properties.
  • Income approach: weigh the potential cash income flowing in. This applies to rental properties.

Investment Purpose

Buying a property requires a sizable capital. You need to be able to finance your investment property. If further down the line, you wish to sell it, you also need to allocate a lot of time to do so. Due to these elements, real estate investors must establish a solid purpose for their investment.

If not, they may face financial stress if they need to pay off a mortgage loan for it solely with their own funds.

Considering the following categories helps you make the best plan:

  • Buy and use: owning a property allows you to save on rent and also increases potential property appreciation over time.
  • Buy and lease: renting out a property ensures passive income and also leads to real estate appreciation. However, being a landlord requires patience and skills in managing a property and tenants. You want to manage the unit but also keep tenants happy.
    a person dressed in black setting up a home for sale sign
  • Buy and sell (short-term): investing by constructing a property and selling it after it’s finished is for investors focused on getting a small to medium profit.
  • Buy and sell (long-term): investing over a long period to capitalize on property appreciation is for investors with a long-term purpose.

Expected Cash Flow

Cash flow is the amount of money left once all expenses are paid off. To determine if an investment has a good rate of return, it must have a positive cash flow.

Create projections for the following types of profits and expenses:

  • Expected cash flow derived from your rent income.
  • Potential increase in intrinsic value coming from price appreciation when the property is held for a long time.
  • Benefits of depreciation.
  • Cost-benefit analysis for renovations before the sale to land a higher price.
  • Cost-benefit review of mortgage loans vs appreciation value.

Apply Caution When Dealing with Loans

While loans can be accessible and convenient for extra funding, they can also be costly. Try not to negotiate the future income of a property by committing to pay loan interest spread over several years.

Analyze deeply the cost of taking on a high degree of debt or overleveraging. Loans present a lot of risks, especially when the market is not performing well.

a roll of money

You need to be mindful of the following:

  • Mortgage types that best fit your situation: checking the rate terms that are favorable for you. Each mortgage type carries its own risk and you need to conduct research before choosing one.
  • Review: conditions, fees, and terms offered by the mortgage lender.
  • Choosing a provider: avoid narrowing down your choice to one provider and look around for other ones with better interest rates and terms.

Indirect Investments in Real Estate

If handling physical properties over the long term is not suitable for you, you can still invest in real estate indirectly. There are plenty of available alternatives that may better suit your needs.

Here are some of the ways you can invest indirectly in real estate properties:

  • Real estate investment trusts (REITS)
  • Real estate company stocks
  • Real estate sector-focused mutual funds and ETFs
  • Mortgage bonds
  • Mortgage-backed securities (MBS)

Bottom Line

Real estate investment provides an investor with regular cash flow, potential income from higher property appreciation, and increased tax benefits. That’s why real estate is considered an outstanding type of investment. Before purchasing any property, it’s advisable to check the critical factors outlined above.

If you have any questions about real estate investing don’t hesitate to contact Paramount Realty Real Estate. Contact us today for more information!