8 Important Factors for Real Estate Investing
1. Property Location
Why Property location is 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 neighbourhood’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 Out 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.
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.
What to Look For
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 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
Identify which of the 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 valueappreciation over a long period. This offers alternatives to compliment long-term goals, such as retirement.
4. 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
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)
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