Few assets and investment options can compete with the potential and stability that real estate offers to individuals and households. Over the years, real estate investment has proven to be the #1 asset for investors. When done right, you can enjoy all the benefits that come with property investment like stable rental income, stability against economic shocks, and tax benefits.
Interested in real estate investing? The question remains, what are you to look out for? What are the key considerations? The team from KRS Property Management has put together this article as a guide. We are going to look at some of the key investment considerations as you plan to build or diversify your portfolio.
Location
It should not shock you that location is the top consideration of any real estate investor. Property, unlike other assets, is an immovable one and its value is derived from its proximity to amenities and services in the area.
The signs of a profitable investment property are the proximity to variables that would be considered crucial in the daily living of potential tenants. This includes proximity to freeways, transportation hubs, shopping districts, healthcare facilities, and green spaces.
Should you be located in an ideal location, you could enjoy steady demand from potential renters. In addition to this, you can charge higher rent prices and enjoy a higher return on investment (ROI).
Property Valuation
So, how do you arrive at the price that you are going to buy the property at? While you can peruse the market for comparable options in the market, we recommend that you get in touch with registered and experienced property appraisers.
Appraisers are experts who are trained in the estimating of the worth of property and other assets. Property valuation is especially important when you are going to get financing for the purchase of the property. It also proves important during taxation and insurance of the property.
You should be aware of the valuation methods. Here are the key valuation methods that are used to appraise most properties:
- Sales Approach - This approach uses recent transactions of similar properties to the subject asset in the neighborhood. The appraiser will adjust the comparables, making slight considerations for differences in age, quality of the finishes, condition, and more.
- Cost Approach - Also known as the contractor’s approach, this method involves a hypothetical separation of the cost of the land and the development. The appraiser will use the sales to calculate the cost of the land. For the development, they would use the applicable construction rate taking into account depreciation.
- Income Approach - This approach is best suited for income-generating properties. Using an appropriate factor, the appraiser will discount the future earnings of the property to a present value.
Investment Goal and Length
While it has its unique characteristics, one must have an exit strategy for their time as a property owner. Therefore, your investment goals as a property owner must be clear from the start. From our experience in the property industry, we have identified several investment goals and horizons:
- Buy and Sell - This type of property owner is looking for quick profits in the property industry. Foreclosed properties are the target for these investors, purchasing them at a low price, renovating them, and selling them at a higher price.
- Buy and Lease - This type of property owner is often a long-term investor. They want to enjoy the stability of property, its rental income and the appreciation promised as the demand for it rises.
- Buy, Hold, and Sell - Some property owners might sell their properties after a long holding period. Such property owners have enjoyed massive appreciation and are exiting the market pushed by retirement or a location change.
Cash Flow Calculations
You are meant to compare your property against other potential investments in the area. The only way to do this is by using cash flow analysis. The general idea is to have a positive cash flow after you have removed all expenses.
You will need some local property information as you make your calculations. You will need information on rental rates, occupation, depreciation, taxation, and more. With this data, you can compare your property against other financial investment options.
Financing
Property is an expensive asset to acquire. Even in the most affordable neighborhoods, you might be parting with hundreds of thousands of dollars to acquire the asset. As such, most property owners find themselves mixing debt and equity to afford an investment property.
You will find a plethora of finance and mortgage companies ready to offer you a mortgage to purchase the property. While it offers some convenience, it comes at a heavy cost in the form of the interest rate.
We recommend that you perform thorough due diligence, searching the market for the best rates and terms before appending your signature to a mortgage agreement.
Bottom Line
As you consider making your property investment, you should consider the investment goal and length, the location of the property, cash flow calculations, and more. These factors or variables will make you make the right decision as you build your investment portfolio.
Are there any other considerations? While you might make the ideal selection, there is one important element that will determine the success of your property investment, and that is management.
For property owners in Raleigh, the partner to rely on is KRS Property Management. We are a leading service provider in the region, adding value to our client’s assets and ensuring that their properties achieve their potential. Get in touch with KRS Property Management and receive a quote for our services!