Compared with other types of investments, real estate investing involves a relatively favorable risk/reward profile, with relatively low liquidity (ease of entry and exit). Let's see some of the most important factors to consider when investing in real estate.
Why is it important? The age old punch line "Location, Location, Location" still rules and remains the most important factor for profitability in real estate investment. Proximity to amenities, peaceful conforming areas, neighborhood status, scenic views, etc. are major factors for residential property valuations. While proximity to markets, warehouses, transport hubs, freeways, tax-exempt areas, etc. play an important role for commercial property valuations.
What to look for? A mid-to-long-term view, about how the locality is expected to evolve over the investment period. Today’s peaceful open land at the back of a residential building may be developed into a noisy manufacturing facility in future, making the residential valuations less profitable. It is advisable to conduct thorough check about ownership, type and intended usage of neighboring areas, establishments and free land in the locality.
What to look for? Commonly used valuation methodologies include:
Why is it important? Given the low liquidity and high-value investment in real estate, lacking 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 prepare yourself accordingly:
Why is it important? The investment purpose and usage influence cash flows and hence profit opportunities.
What to look for? Develop draft projections for the following modes of profit & expenses:
Why is it important? Loans are convenient but may come at a big cost — you commit your future income, to get utility today for a cost of interest spread across many years. Understanding how to handle loans of this nature allows you to benefit from it to the maximum. While ignoring the risks can lead to major pitfalls.
What to look for? Depending upon your current and expected future earnings and paying capability, consider the following:
Why is it important? New construction properties usually offer attractive pricing, the option of customization, clearly documented amenities and clear titles. The investor has to deal with only the construction company as a counterpart. Risks include delay in possession, an increase in costs, no awareness about the neighborhood, etc.
Those on resale have vice-versa factors and may need a more thorough check on ownership, documents, and legal matters.
What to look for?
Managing physical properties over a long term horizon is not for everyone. There are also a few alternatives to indirectly invest in the real estate sector and aim to reap the benefit.
What are the Options?
Real estate investments offer a good high-value risk-return profile. Thoughtful consideration of the above-mentioned factors in mind will enable investors to reap the benefits while mitigating the risks.