Investing in real estate is a great way to earn extra income. However, not all real estate investors become successful. There are several factors that can affect the success of an investment.
If you want to be a profitable real estate investor, you should know what to look for when finding an investment property.
In this post, we are going over all the important factors to consider when trying to determine the best real estate investment.
1. Location of the Property
Real estate investors know that location is one of the key factors that can either make or break an investment. If you want to be profitable, make sure to find the right location for your real estate investment.
Keep in mind that not all real estate markets are optimal for investing.
When finding the right investment location, make sure to consider the following:
- Amenities: Proximity to basic amenities and essential services is one of the most important factors that can help you identify a good location. For example, find a property that is close to schools, medical services, grocery stores, dining, shopping centers, and public transportation options. Areas that are also close to recreational facilities and business districts are a plus.
- Safety: Even if the location is close to basic amenities, if it is not safe for residents, it will unlikely be an ideal place for investment. You have to ensure that you are buying an investment property in a safe community. Check the crime rates in the area and visit the actual place to see if it is generally safe to live in.
d - Mid to long-term view: When considering a location, make sure to check the mid to long-term projects that are developing in the area. For instance, a peaceful neighborhood may become home to a manufacturing facility after 10 years or so. If this happens, your investment property will diminish in value.
2. Valuation of the Property
The value of the property is another factor that you have to consider when buying an investment home. You will need to consider the value of the property when financing the purchase, listing the property for sale or for rent, getting property insurance, paying taxes and interest rates, and calculating your returns.
You want to look for a property that is valued reasonably. However, you should also ensure that you stick to your budget.
When evaluating the value of the property, make sure to consider the following;
- Study and analyze the real estate comps: Find similar properties with the same characteristics and analyze how they were sold (including their purchase price, days on market, etc).
- Analyze the cost of the property: Study the cost of the land and construction less depreciation. This approach is suitable for properties that are newly constructed.
- Calculate the potential income: If you plan to rent out your investment property, analyze the rental comps of similar properties in the area. Study the income based on the projected cash inflows and outflows.
3. Your Planned Investment Strategy
There are several ways to earn money from your real estate investment.
From the start, decide your preferred investment strategy as this will greatly affect the type of investment property that you should buy. Failing to identify your investment strategy early on could lead to a wrong decision.
Here are a few ways you can earn money from your real estate investment:
- Buy and rent: This is one of the most common real estate investment strategies available. Many investors buy a property to rent out to tenants, either as a long-term rental or as a vacation rental. If you choose this strategy, make sure to find a property that’s ideal for your preferred rental approach (long-term or short-term).
- Buy, fix, and sell: This is also known as fix-and-flip, where investors buy a fixer-upper property, have it renovated, and sell it for a profit. If you choose this strategy, make sure to set a proper budget for the renovation.
- Buy and sell: This usually refers to the properties that are newly constructed where investors buy a unit and sell it right away for profit.
- Buy, use, and sell: Some investors also choose to buy a property for their own use, wait a few years when the value of the property appreciates, then sell it for a profit. This type of investment strategy is a long-term investment and investors will not realize a profit until after a few years.
4. Appreciation Rate
Taking into consideration the home appreciation rate in the market where you plan to invest in is also critical.
This is especially important if you plan to wait a few years before you sell your investment property. You want to invest in a place where there is a steady appreciation rate to ensure that your property will increase in value.
5. Expected Cash Flow and Projected Profits
Real estate investors invest in real estate because they want to earn profits. It’s important to know the profitability of the property before you decide to purchase it.
As an investor, it is your responsibility to study the expected cash inflows and outflows of a property. This is especially applicable if you plan to invest in rentals.
In addition, you should also analyze the projected profits you can earn from a particular investment property. This way, you will know if the property will make a good investment or not.
When analyzing cash flows and profits, make sure to research how much you will possibly spend on recurring expenses, such as taxes, insurance and maintenance, as these will greatly affect the computation.
Conclusion
Investing in real estate can be lucrative if you buy the right investment property. Just like any investment, there are risks involved with real estate. To mitigate these risks, make sure to know how to find the right investment from the start.
Consider the factors mentioned above when finding your next real estate investment.
For more information, contact East Bay Property Management today.
