What's the most important thing to look for in real estate? While location is always a key consideration, there are numerous other factors that help determine if an investment is right for you. Here's a look at some of the most important things to consider if you plan to invest in the real estate market.
1. Property Location
Why It's Important
The adage "location, location, location" is still king and continues to be the most important factor for profitability in real estate investing.Proximity to amenities, green space, scenic views, and the neighborhood's status factor prominently into residential property valuations. Closeness to markets, warehouses, transport hubs, freeways, and tax-exempt areas play an important role in commercial property valuations.
What to Look For
A key when considering property location is the mid-to-long-term view regarding how the area is expected to evolve over the investment period. For example, today’s peaceful open land at the back of a residential building could someday become a noisy manufacturing facility, diminishing its value. Thoroughly review the ownership and intended usage of the immediate areas where you plan to invest.
One way to collect information about what are the prospects of the vicinity of the property you are considering is to contact town hall or other public agencies in charge of zoning and urban planning. This will give you access to the long-term area planning and make a determination how favorable or unfavorable to your own plan for the property.
2. Valuation of the Property
Why It's Important
Property valuation is important for financing during the purchase, listing price, investment analysis, insurance, and taxation—they all depend on real estate valuation.
Commonly used real estate valuation methods include:
Sales comparison approach: recent comparable sales of properties with similar characteristics—most common and suitable for both new and old properties
Cost approach: the cost of the land and construction, minus depreciation— suitable for new construction
Income approach: based on expected cash inflows—suitable for rentals
3. Investment Purpose and Investment Horizon
Why It's Important
Given the low liquidity and high-value investment in real estate, a lack of clarity on purpose may lead to unexpected results, including financial distress—especially if the investment is mortgaged.
What to Look For
Identifywhich ofthe following broad categories suits your purpose, and then plan accordingly:
Buy and self-use. Here you will save on rent and have the benefit of self-utilization, while also getting value appreciation.
Buy and lease. This offers regular income and long-term value appreciation. However, the temperament to be a landlord is needed to handle possible disputes and legal issues, manage tenants, repair work, etc.
Buy and sell (short-term). This is generally for quick, small to medium profit—the typical property is under construction and sold at a profit on completion.
Buy and sell (long-term). This is generally focused on large intrinsic value appreciation over a long period. This offers alternatives to compliment long-term goals, such as retirement.
4. Expected Cash Flows and Profit Opportunities
Why It's Important
Cash flow refers to how much money is left after expenses. Positive cash flow is key to a good rate of return on an investment property.
What to Look For
Develop projections for the following modes of profit and expenses:
Expected cash flow from rental income (inflation favors landlords for rental income)
Expected increase in intrinsic value due to long-term price appreciation.
Benefits of depreciation (and available tax benefits)
Cost-benefit analysis of renovation before sale to get a better price
Cost-benefit analysis of mortgaged loans vs. value appreciation
5. Be Careful with Leverage
Why It's Important
Loans are convenient, but they may come at a big cost. You commit your future income to get utility today at the cost of interest spread across many years. Be sure you understand how to handle loans of this nature and avoid high levels of debt or what they call over-leverage. Even experts in real estate are challenged by over-leverage in times of adverse market conditions and the liquidity shortages with high debt obligations can break real estate projects.
What to Look For
Depending upon your current and expected future earnings, consider the following:
Decide on the type of mortgage that best fits your situation—fixed-rate, adjustable-rate mortgage (ARM), interest-only, zero down payment, etc. Note that each type of mortgage has its own risk profile and you need to study each carefully. For instance, ARM includes mortgage rates that can change at any time driven by capital market forces and the borrower must accept any rate changes during the loan term.
Be aware of the terms, conditions, and other charges levied by the mortgage lender.
Shop around to find lower interest rates and better terms.
6. New Construction vs. Existing Property
Why It's Important
New construction usually offers attractive pricing, the option to customize, and modern amenities. Risks include delays, increased costs, and the unknowns of a newly-developed neighborhood.
Existing properties offer convenience, faster access, established improvements (utilities, landscaping, etc.), and in many cases, lower costs.
What to Look For
Here are some key things to look for when deciding between a new construction or an existing property:
Review past projects and research the construction company's reputation for new investments.
Review property deeds, recent surveys, and appraisal reports for existing properties.
Consider monthly maintenance costs, outstanding dues, and taxes. Costs such as these can severely impact your cash flow.
When investing in leased property, find out if the property is rent-controlled, rent-stabilized, or free market. Is the lease about to expire? Are renewal options favorable to the tenant? Who owns the furnishings?
Quality-check items (furniture, fixtures, and equipment) if these are to be included in the sale.
7. Indirect Investments in Real Estate
Why It's Important
Managing physical properties over a long-term horizon is not for everyone. Alternatives exist that allow you to invest in the real estate sector indirectly.
What to Look For
Consider other ways to invest in real estate:
Real estate investment trusts (REITs)
Real estate company stocks
Real estate sector-focused mutual funds and ETFs
Mortgage bonds
Mortgage-backed securities (MBS)
8. Your Credit Score
Why It's Important
Your credit score affects your ability to qualify for a mortgage, and it impacts the terms your lender offers. If you have a higher credit score, you may get better terms—which can add up to substantial savings over time.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).
What to Look For
Scores greater than 800 are considered excellent and will help you qualify for the best mortgage. If necessary, work on improving your credit score:
Pay bills on time—set up automatic payments or reminders
Pay down debt
Aim for no more than 30% credit utilization
Don't close unused credit cards—as long as you're not paying annual fees
Limit requests for new credit and "hard" inquiries
Review your credit report and dispute inaccuracies
9. Overall Real Estate Market
Why It's Important
As with other types of investments, it's good to buy low and sell high. Real estate markets fluctuate, and it pays to be aware of trends. It's also important to pay attention to mortgage rates so you can lower your financing costs, if possible.
What to Look For
Stay up-to-date with trends and statistics for:
Home prices and home sales (overall and in your desired market)
New construction
Property inventory
Mortgage rates
Flipping activity
Foreclosures
The Bottom Line
Real estate can help diversify your portfolio. In general, real estate has a low correlation with other major asset classes—so when stocks are down, real estate is often up. A real estate investment can also provide steady cash flow, substantial appreciation, tax advantages, and competitive risk-adjusted returns, making it a sound investment.
Of course, just like any investment, it's important to consider certain factors, like the ones listed here, before you invest in real estate—whether you opt for physical property, REITs, or something else.
The three most important factors when buying a home are location, location, and location. Too often I hear people talking about making decisions based on the home itself, instead of the location, and that is a mistake.
The three most important factors when buying a home are location, location, and location. Too often I hear people talking about making decisions based on the home itself, instead of the location, and that is a mistake.
The adage "location, location, location" is still king and continues to be the most important factor for profitability in real estate investing. Proximity to amenities, green space, scenic views, and the neighborhood's status factor prominently into residential property valuations.
Any investment can be characterized by three factors: safety, income, and capital growth. Every investor has to pick an appropriate mix of these three factors. One will be preeminent. The appropriate mix for you will change over time as your life circ*mstances and needs change.
They evaluate credit and payment history, income and assets available for a down payment and categorize their findings as the Three C's: Capacity, Credit and Collateral.
Becoming knowledgeable and educated about the real estate market is crucial, but this often comes with more than just in-class learning. Understanding the risks, investing in an accountant, finding help, and building a network are all part and parcel to the successful real estate investor.
Real estate investors make money through rental income, appreciation, and profits generated by business activities that depend on the property. The benefits of investing in real estate include passive income, stable cash flow, tax advantages, diversification, and leverage.
The first step is to earn enough money to cover your basic needs, with some left over for saving. The second step is to manage your spending so that you can maximize your savings. The third step is to invest your money in a variety of different assets so that it's properly diversified for the long haul.
These four characteristics are (1) Intentionality, (2) Evidence and Impact data in Investment Design, (3) Manage Impact Performance, and (4) Contribute to the growth of the industry.
A good rule is that a 1% increase in interest rates will equal 10% less you are able to borrow but still keep your same monthly payment. It's said that when interest rates climb, every 1% increase in rate will decrease your buying power by 10%. The higher the interest rate, the higher your monthly payment.
Applying the 5% rule would look like this: Multiply the value of the property you own/like to obtain by 5%.Divide by 12 (to get a monthly amount). If the resulting amount is costlier than you would pay to rent an equivalent property, renting your home and investing your money in rental properties may work better.
Allred credits a huge portion of his success to a deep understanding of the five pillars that create wealth in real estate — cash flow, market appreciation, tax benefits, principal reduction, and leverage.
The most popular way is to buy an investment property and slowly build up your portfolio. Generally, there are two primary ways to make money from real estate assets — appreciation, which is an increase in property value over a period of time, and rental income collected by renting out the property to tenants.
What Is The 1% Rule In Real Estate? The 1% rule of real estate investing measures the price of the investment property against the gross income it will generate. For a potential investment to pass the 1% rule, its monthly rent must be equal to or no less than 1% of the purchase price.
Mallouk defines the five most common investment missteps—market timing, active trading, misunderstanding performance and financial information, letting yourself get in the way, and working with the wrong investment advisor—and includes detailed information on how to dodge the most common investing pitfalls.
Real estate investments tend to have high transactional costs, especially in legal and brokerage fees. The process of acquiring a new property is also very long and tedious with lots of legal formalities. Another disadvantage of property investments is that they are not easy to liquidate.
The number one objective for investing in real estate is: to make money. 2. Commercial banks make the majority of their funds available for: high interest loans.
What are market risks? The fear of price fluctuations may be the one risk that keeps most would-be investors from actually investing. The prices for securities, commodities and investment fund shares are all affected by price fluctuations.
The most successful investors invest in stocks because you can make better returns than with any other investment type. Warren Buffett became a successful investor by buying shares of stocks, and you can too.
Action Alerts Plus portfolio manager and TheStreet's founder Jim Cramer says that if you don't do your stock homework you should not be investing your own money.
The most common factors are value, momentum, quality, low volatility and size. Factor investing is done by designing a portfolio of stocks using parameters representing a particular factor. For example, one may use high sales to price or high earnings to price among others to buy value stocks.
The capital of a business is the money it has available to pay for its day-to-day operations and to fund its future growth. The four major types of capital include working capital, debt, equity, and trading capital.
NPV Method is the most preferred method for capital budgeting because it considers the cash flow in the tenure and the cash flow uncertainties through the cost of capital. Moreover, it constantly boosts the company's value, which is void in the IRR and profitability index.
The eight capitals: intellectual, financial, natural, cultural, built, political, individual and social. To build a region's wealth, WealthWorks considers not just financial assets, but includes the stock of all capitals in a region.
Socially responsible (SRI) and environmental, social, and governance (ESG) investing are two approaches to impact investing, although there is still some disagreement over terminology in the investing community.
Real estate has seven specific characteristics related to its economic impact or physical nature. They are scarcity, improvements, location, investment permanence, uniqueness, immobility, and Indestructibility. A real estate property can be classified into residential, commercial, industrial, or land.
There are five main categories of real estate which include residential, commercial, industrial, raw land, and special use. Investing in real estate includes purchasing a home, rental property, or land. Indirect investment in real estate can be made via REITs or through pooled real estate investment.
A good real estate agent doesn't just sell properties—they sell themselves. It's important to show your real personality. People will respond to you if you have a great attitude, are personable and honest, have confidence in your abilities, and are interested in helping them and others.
Housing supply is a strong indicator of price. If the housing supply in an area goes down, it means that more people are moving to that area. This raises the average price of each home and means you'll have more competition if you want to buy.
If you haven't renovated your home in the past 30 years or so, it won't show well when you put it on the market. In other words, it won't get the same price as a similar home that's been maintained and updated.
The highest expense for most practices is payroll, followed by real estate. Real estate encompasses your monthly rent or mortgage payments, along with the property's operating expenses, maintenance fees, utilities, and janitorial costs.
Many sellers compare their houses to those in the neighborhood and want to sell them as quickly as others. It's your responsibility to make them understand the real scenario. This is one of the most common problems that real estate markets face.
Unfortunately, there's always the risk of a high vacancy rate in real estate investing. High vacancies are especially risky if you count on rental income to pay for the property's mortgage, insurance, property taxes, maintenance, and the like.
Real estate investments are known for providing low returns. Traditionally, the returns on real estate investments have been less than the rate of inflation.
Introduction: My name is Terrell Hackett, I am a gleaming, brainy, courageous, helpful, healthy, cooperative, graceful person who loves writing and wants to share my knowledge and understanding with you.
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