Are you considering real estate as a means of investing and building your wealth? It can be a very rewarding choice, and there are many different ways you can go about it. However, there are quite a few things that you’ll need to know before you make your first investment. There are many factors that you’ll need to understand, and we’ll cover the most important of those below.
Location, Location, Location
You’ve heard that the mantra in real estate is location, location, location, and that’s true in real estate investing as well. It really is all about location. You need to consider every aspect of a property’s location before you determine whether it’s a worthwhile investment option or not. What aspects should you consider? How far is the property from major shopping and dining venues? What about businesses? Where are amenities located, and what’s the prospect for the immediate area in terms of growth and development? Where’s the nearest interstate or major highway? What about warehouse districts or transportation hubs?
Have the Property Valuated
A professional property valuation is a vital tool for any would-be property investor. Why is it important to have an independent valuation done? Simply put, it ensures that you’re getting what you pay for, and that the value of the property is greater (or will appreciate higher) than the price tag. There’s also the fact that pretty much every step of the financing process will hinge on the valuation. The income approach is a suitable valuation method for rental properties, while the sales approach comparison can be used for old and new properties. The cost approach is best suited to newly constructed properties.
What will the purpose of the investment property be? What is your investment horizon? Both of these are crucial considerations, because real estate has high value, but is not particularly liquid (not in comparison to other investment vehicles, at any rate). There are multiple purposes that you can use here, ranging from buying and using the property yourself to buying and leasing, buying and selling in the short term, or buying and selling down the road. Each offers different benefits (and drawbacks), as well.
Your Income Possibilities
When considering any type of real estate investment, you need to know how you plan to make money. There are multiple ways to do this, and several different combinations that includes more than one way. The income possibilities will affect your number of profit opportunities, as well as your cash flows. For instance, you could expect to only see cash flow from rental payments, and inflation makes this a smart idea. However, you could also expect to reap benefits from appreciation and a sale in the future. Depreciation can be used to offset a tax burden, and it may be possible to provide some minor (less expensive) renovations and reap a higher sale price down the road.
Unless you have a significant amount of existing capital (and sometimes even then), you’re going to need a mortgage to take advantage of real estate. Know the type of mortgage that will best suit your ultimate goals for the property, as well as your expected cash flows.
New or Existing?
New construction is sometimes quite affordable (all things considered) plus the potential to customize many aspects. However, existing construction can be even lower priced, although there may be a need to invest a significant amount of capital in renovations and improvements. There is also the question of past ownership when buying an existing property. For new construction, you’ll need to consider the reputation of the construction company, but existing construction will require you to consider the deed and any old appraisals, as well as estimates of maintenance and utility costs based on the past.
Is Direct Ownership Right for You?
Finally, for many real estate investors, direct ownership is a great choice. However, if you don’t want to deal with the hassles that come with being a landlord, indirect investment through an REIT or a similar setup might be the better choice, as these can allow you to reap financial rewards without the headaches that often go hand in hand with direct ownership.