5 Things To Know Before Investing In Real Estate

When done right, real estate investing provides steady income streams. But like other revenue-generating schemes, it does come with certain risks. 

Investing In Real Estate

While some real estate investing methods no longer require substantial amounts, such as investment trusts, syndications, and other crowdfunding platforms, it's in an investor's best interest to exercise caution. That said, doing your homework and exercising due diligence is crucial. 

If you're injecting capital into real estate properties as a rookie, consider the following points to minimize the risks and avoid costly mistakes.    

1. Know Your Investment Return Potential

Besides knowing the different modalities of real estate investing, it's crucial to understand how you can make your money grow. Multiple performance indicators can help you determine your income potential. For instance, if you're buying a rental property, you can calculate the gross potential income of the asset by adding all the units' monthly rents and multiplying it by twelve. 

Additionally, there's another metric called cap rate in real estate. Short for capitalization rate, this refers to the rate of return expected from an investment property. You can generate this by getting the property's net operating income and dividing it by its current fair market value, expressed in percentage. Capitalization rate is often used to predict an investor's potential return alongside other metrics.  

2. Your Investment Purpose And Options 

Spending your life savings on a mortgaged rental property that isn't performing as you've expected can lead to financial loss. Before parting with your money, understand why you're investing. Identify if it's for retirement or for diversifying your portfolio. Can you wait for years to earn significant amounts, or do you prefer to have quick, low to average, yet steady returns? These are the questions you have to answer before choosing the type of property to invest in. 

For example, getting a commercial rental property may draw in robust and steady returns. Still, maintenance and repair works, alongside legal implications, might become a nightmare for investors with full-time jobs. Conversely, house flipping may be better for others looking to make easy money and huge investments.  
3. Get Familiar With The Area You Want To Invest In 

Location may be one of the primary considerations in real estate investing. Buyers are willing to pay a premium for properties close to their school or jobs. Living spaces near transportation hubs, entertainment centers, green spaces, and essential amenities like hospitals are a few of the things that help increase property value. 

On the other hand, you can also watch out for up-and-coming developments on the city's outskirts. States have long-term plans for developing a specific area, and it's wise to get a hold of this to determine how the site will evolve in the next few years. 

For instance, a quiet and laidback suburban community may be developed to become the next tech or government offices hub, driving its real estate valuation through the roof in the next five years.  

The idea is to have the tools you need to predict the future market performance in a given area like stock analysts do when studying and understanding stock graphs

4. Property Valuation 

All real estate transactions rely on property valuation to make decisions or move forward. Sellers must create a fair market value for their assets. Buyers must consider the price before moving forward or negotiating for a lower price. Governments and insurance companies calculate tax obligations and premiums based on the value of a property. Most importantly, investors can't determine the asset's income potential without it. 

That said, property valuation is at the heart of every activity, and an investor must understand how it works. Besides looking at the condition and location, property assessors often use three primary methods in property valuation: 

• Sales comparison method: It works well for residential properties, where professionals compare the sales prices of comparable properties sold.

• Income approach: Often for rental properties, assessors consider the asset's predicted revenue and inflow. 

• Cost approach: For newly-built properties, and is calculated by adding construction expense and land cost, less depreciation.     

5. Know The Risks 

invest in real estate

Real estate investment carries accompanying risks, even if the market seems to be performing well. For instance, your commercial rental property may be severely damaged during a natural disaster requiring significant and costly repairs. Or, a violent crime in the community might drive away potential lessors to your apartment or condominium, reducing your income. 

Additionally, the market can be unpredictable and vary from one city to another. So, you must ensure that you're aware of the market trends. For instance, you may have chosen a Real Estate Investment Trust (REIT) for a hotel and suffered losses due to high vacancy rates during the pandemic. Next time, consider a mixed-use property for more resiliency.  

As with other investments, real estate investing needs to be studied carefully, especially if you're a newbie. By knowing the basics as discussed above, you'll make an informed decision on whichever investment scheme you wish to undertake. Furthermore, by studying the market and the risks involved, you can protect yourself by diversifying your investments or making your finances more flexible.   

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