6 Factors That Matter In Real Estate Investment

6 Factors That Matter In Real Estate Investment

6 Factors That Matter In Real Estate Investment
In recent times, several terms have found their way into the country's real estate parlance. (Dreamstime)

Even though real estate investments are not very liquid, the favourable risk return tradeoff makes it more affordable to many investors. Let us look at the most important factors you should keep in mind, before investing in real estate.

Location of the property

The location of the property is the most important factor that influences the viability of real estate investment. For residential property, the quality of the neighbourhood, basic amenities, safety, and environmental quality are the most important factors. But if it commercial property, proximity to major markets, transport hubs, warehouses and expressways become more decisive factors.

What should an investor look for? 

Real estate investors should consider the location as a priority, and should be able to fairly predict how the locality may evolve over the investment period. It is quite possible that a peaceful residential area will be developed into a crowded commercial area in future, making an investment in residential property less profitable. Do a thorough study about ownership, type and intended usage of neighboring areas and establishments. Learn more about free, available land in the locality.

Valuation of the Property

The entire financing of the purchase, investment analysis, taxation, insurance premium and other factors largely depend on valuation of the property.

What should an investor look for? 

Investors should follow the commonly used valuation methods. These include:

  • Sales evaluation method: Find out more about recent sales of comparable properties – This is the most common, and suitable for both new and old properties
  • Cost method: All cost summary minus devaluation – Suitable for new construction
  • Income method: Based on projected cash inflows - Suitable for rentals

Investment purpose & investment prospect

As real estate investments are not very liquid, and because these are high ticket investments, lacking precision in purpose will lead to financial distress. This is especially true of the property is mortgaged.

What should an investor look for? 

Investors should identify the extensive categories that suit their purpose, and prepare the investment structure. These are four broad categories of investment.

  • Buy & self-use: You can save on rentals, and will benefit from self-consumption and value appreciation
  • Buy & lease: Steady income & long term value appreciation. Needs to build up the temperament of a landlord - for handling prospective disputes & legal issues, managing tenants, repair work, etc.
  • Buy & sell (Short Term): Quick, small to mediocre profit. This typically involves buying under construction properties and selling a little higher price once they are ready.
  • Buy & sell (Long Term): Large inherent value appreciation over long period of time. Such investments fit into your long-term goals like retirement planning, and children's education

Expected cash flows & profit opportunities

The investment purpose and the procedure influence cash flows and hence, profit opportunities.

What should an investor look for? 

Investors should develop draft projections for the following media of profit and expenditures:

  • Expected cash flow from rental income
  • Expected rise in inherent value because of long-term price appreciation
  • Benefits of depreciation (and available tax benefits)
  • Cost-benefit analysis of renovation before sale is important to demand a higher price
  • Cost-benefit analysis of mortgaged loans vs value appreciation 

Beware of the pitfalls

Today, taking a loan is the most convenient way to buy an asset, but this may come at a huge price. A buyer commits their future income for higher current utility. The interest payment of a home loan is spread over several years. Make sure that you understand the process well so that you can make the most out of it. Ignoring the risks may lead to major downsides.

What should a buyer should look for? 

Depending on your current & expected future earnings and paying capability, keep these in mind:

  • Pick the loan type (Fixed Rate, Adjustable Floating Rate, Interest Only or Zero Down Payment) carefully, finding out which suits you best
  • Be aware of the terms & conditions and other charges imposed by financiers
  • Search and bargain for a better deal. This may involve lower interest rates, lower insurance premiums or processing charges waivers.

Investment in under construction/new construction vs prevailing ones

Under construction properties offer attractive prices, the option of customisation, clearly documented amenities and clear headings. But buying these kind of properties involve many risks, which include delay in possession, rising costs and changes in the layout and design. Properties that are on resale mode do not impose such constraints, but make sure that the property has clear ownership titles and other documents.

What should an investor look for? 

  • Do a detailed research. Find out more about past projects and the reputation of the developer. Find out how the developer has handled new and under construction properties.
  • If you are buying already constructed properties, be aware of maintenance costs, outstanding dues & taxes from previous owners. These costs can have a severe impact on regular cash flows.
  • If you are investing in on-lease property (possessed by others), ask whether it is rent controlled? When will the lease expire? Does it have renewal options in favour of the tenant? Who will own the interiors – the tenant or the owner? These are some of the questions investors should ask.
  • If the property is well-furnished, do a quality-check of items like furniture, fixtures and other equipment. 

If you keep these factors in your mind while investing in real estate, the long-run returns are likely to be good.

Last Updated: Thu Sep 01 2016

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