Key Factors to Consider Before Investing in Real Estate
Investing in real estate can be lucrative, but it’s not without complexities and risks. Whether you’re a seasoned investor or just starting, understanding the key factors influencing real estate investments is crucial for making informed decisions. Here, we’ll go over the most important considerations before making your next investment.
How Does Real Estate Investing Work?
You can become a real estate investor in several ways, both directly and indirectly. Direct investors can make money on the income generated from rental properties (e.g., rent and appreciation). You can flip houses, rent out your apartment or home on Airbnb, find different tenants to occupy the space long-term, and more. These options require property management and a bit more time and resources. However, there are alternatives to buying an investment property and dealing with tenants.
Indirect investments in real estate include real estate investment trusts (REITs), mortgage bonds, exchange-traded funds, private equity funds, real estate company stocks, and more. So, the first step to consider when investing in real estate is whether you want to be directly involved or take a more hands-off approach.
10 Important Factors for Real Estate Investing
Those who want a more direct approach have several important factors to consider before taking action. Some of the things you should consider before buying an investment property include the following.
The Location of Investment Properties
The location of an investment property remains one of the most important factors in determining its potential success. A property in a thriving area with high demand for housing, good schools, low crime rates, and proximity to amenities such as shopping centers, parks, and public transportation will likely appreciate and attract reliable tenants. Commercial real estate investments may be more desirable near freeways, warehouses, or tax-exempt areas.
Conversely, properties in less desirable locations may struggle to generate rental income and appreciate slower. It’s important to understand each neighborhood’s growth potential and future infrastructure developments, which you may be able to get from zoning and urban planning agencies.
Type of Property
Another key consideration before investing in real estate is which type of property you want to purchase. Residential properties, such as single-family homes, multifamily units, and condominiums, are often easier to manage than commercial properties and have a steady demand. Commercial properties, including office buildings, retail spaces, and industrial properties, can offer higher returns but typically come with greater risk and require more substantial investment.
Working small and building up your portfolio is best when buying a new investment. This can help you mitigate risks while learning to navigate important investment decisions before buying a property with a higher price tag or more complications.
Property Value
Regardless of which property type you choose, you should know the value before buying anything. Overpaying for a property can reduce your potential return on investment and make it more difficult to find tenants willing to pay a higher rent.
The best option is to conduct a comparative market analysis to help you gauge the property’s fair market value. This will essentially compare the existing property to similar properties in the area. You’ll also want to consider the potential appreciation of the property if you plan to make a long-term investment.
Type of Investment Strategy
Your investment strategy will shape the type of properties you invest in and how you manage them. Common strategies include the following:
Buy and lease— Investors purchase properties to rent out long-term.
Buy and self-use — Purchasing a home and using it yourself.
Flix and flip — Buying, renovating, and selling properties for a profit.
Buy and sell — Buying for an investment purpose and selling for either a quick profit (short-term ownership) or a larger profit that can aid in retirement planning (long-term ownership).
Wholesaling — Investors contract properties and sell them to other investors without actually owning them.
Each strategy has risks, rewards, and time commitments, so it’s essential to choose one that aligns with your financial goals, expertise, and resources.
Real Estate Market Trends
Another key to making sound investment decisions is becoming a pro in understanding the current market conditions. Factors like rental rates, housing demand, and nearby property values should be assessed to understand whether you can make smart investment decisions now or wait. You can learn more about the difference between buyer’s and seller’s markets here.
Economic Indicators
Economic indicators, such as interest rates, inflation, and GDP growth, play a significant role in real estate investing. Low interest rates can make borrowing cheaper, boosting property affordability and demand. Conversely, high inflation can erode rental income and property values over time.
You need to consider these indicators to help you make more informed investment decisions. Typically, a healthy economy supports a strong real estate market, while economic downturns can present challenges and opportunities for savvy investors. Working with a real estate agent can help you better understand these indicators and how they impact potential real estate purchases.
Variable Expenses
Variable expenses are the ongoing costs associated with owning and maintaining a property. These include property management fees, maintenance and repair costs, insurance, property taxes, and utilities. Before investing, consider the cost of variable expenses and add that to your projected profit-loss statement. These are important things to consider, as unexpected expenses can quickly erode profits. You should also budget for contingencies, just in case.
Expected Cash Flow and Return on Investment (ROI)
Cash flow refers to the net income generated from a property after accounting for all expenses, such as mortgage payments, taxes, insurance, and maintenance costs. A positive cash flow ensures that your investment is financially sustainable and can generate long-term profits. A negative cash flow means that you’re going to lose money.
ROI measures the efficiency of your investment and allows you to compare different opportunities. A thorough cash flow and ROI analysis can help you make more informed investment decisions and achieve your financial goals.
Your Credit Score
Before investing in a property, we recommend looking at your credit score. Lenders use your credit score to assess your creditworthiness and ability to repay loans. A higher score typically qualifies you for better interest rates and loan terms, reducing borrowing costs and increasing your potential for monthly earnings. Although many factors can affect your score, the best ways to improve include making timely payments and managing your debt responsibly. If your score is low, it may be worth taking some time to improve it before trying to secure funding for a huge investment.
Loans and Mortgage Payments
Unless you have hundreds of thousands of dollars in cash, investing in properties will require financing. Conventional, FHA, VA, and portfolio loans have different eligibility requirements, interest rates, and terms. To make the right decision, it’s important to partner with a professional and understand your options.
Construction Needs
Next, consider whether or not you’ll need to conduct manual labor on your property. Properties that require significant repairs or renovations can present both challenges and opportunities for investors. Estimations should be made before purchasing so you know what costs and resources will be required to bring it up to market standards. If you plan to flip the house, DIY renovations may allow for a significant return on your investment, especially if you plan to live in the home while doing them. However, you’ll need to make sure you have the right permits and licensing before starting the project.
Real Estate Laws
Real estate laws and regulations vary by location and can significantly impact your investment. Zoning laws, landlord-tenant laws, property tax regulations, and building codes are just a few legal considerations that property investors need to navigate.
Staying informed about local real estate laws helps you avoid legal pitfalls, ensure compliance, and protect your investment. If you’re not sure about certain legalities, consult with a professional to avoid major fines or other legal risks.
Diversification of Real Estate Investments
Finally, consider whether you want to diversify your investment portfolio to help mitigate risks. Investing in different types of properties can spread risk and reduce the impact of certain market fluctuations. However, creating a diverse investment property portfolio takes time, so don’t rush into anything.
First Star Realty is here if you’re interested in new real estate investments or need a property manager to help cover existing properties. First Star Realty has several residential and commercial listings for potential buyers and real estate investors. We also have land for sale if you want to start from scratch. Plus, as an experienced property management company, we can help you save time, resources, and energy. First Star Realty always puts our client’s needs first, and we’re committed to maintaining ongoing communication so you can make informed real estate investment decisions. To learn more about our different property management services, contact us today.
