What you should know about real estate before investing
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When it comes to investing, real estate is always seen as a lucrative way to build wealth and earn an income. It offers both long-term appreciation and passive income opportunities, but it does still carry a set of risks, much like any other investment opportunity.
You could be looking to invest your money in residential properties or commercial spaces – as long as you have a good understanding of the fundamentals, you’ll make the best possible decisions that align with your financial goals. Are you planning to get a mortgage with savings or are you going to get some advice on RSU mortgages? Are you looking for residential options or warehousing spaces? There is much to consider! Let’s take a closer look at the essentials that you need to know before investing in real estate, so you can weigh the risk.
Understanding the types of real estate investments
As you might already know, real estate investments come in many forms. Whether you’re looking to buy property and rent it out if you want to flip property for profit as part of a commercial venture, there are different opportunities and challenges involved.
- Residential properties. Most people choose this route when they invest in real estate. Investors like you usually purchase family houses or apartments to rent out to tenants. Residential property investment can offer a steady cash flow if you’re looking for it.
- Commercial properties. Office buildings, retail spaces and even warehouses are usually more expensive than residential properties to purchase but the opportunity for higher returns is possible. Commercial real estate can work to help you to diversify your investment portfolio.
- Real estate investment trusts (REITs). Do you want to get into real estate without actually owning property directly? You can choose to get involved with companies who own, operate or finance real estate across a range of sectors and pay dividends to investors. You get the intro to real estate without any of those property management complications.
- Fix and flip properties. You can buy property, renovate it and flip it for a high profit. It takes a lot of investment to do this and you should make sure that you work with people with experience in property valuation and construction so that you get support with this.
The importance of location
When you’re considering buying up real estate of any type, you have to consider location. The area where your property is situated can make or break how successful your investment is. There are factors in location to consider, from proximity to amenities like shopping centres, schools and hospitals to neighbourhood trends. You have to analyse the performance of property values in the area you want to buy so that you can determine whether you are buying in an area of low or high demand.
Along with these factors, you have to think about the crime rate of the area. Crime rates can be less attractive to tenants and that ends with higher vacancy rates and a lower rental income.
Financing your real estate investment
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To be able to go ahead with your property investment dreams, you need to secure financing. Some investors may have the capital to purchase a property outright, but most investors rely on loans to fund their investment because they have decent credit to do so. Understanding the various financing opportunities available to you is going to help you to make sound decisions that align with your investment strategy. You do have to get this right before you decide to dive into the real estate market.
There are the usual conventional mortgages that you can get from the Bank or a broker, and these are the most common ways to finance real estate investments. Usually, these types of loans require a down payment of at least 20% of the value of the property and the terms and interest will vary.
This could depend on the loan amount, your credit score, and the requirements of the lender itself. If you have accumulated any wealth in the form of restricted stock units, RSUs, some lenders offer RSU mortgages. These mortgages are specialized and they allow investors to use their RSUs as a part of their down payment, or as collateral when purchasing the property. These are a good option for tech professionals or other high income earners who have received a significant portion of their compensation in RSUs.
If you’re looking to flip any properties or you need quick funding for a real estate deal, a hard money loan can be an option, and these are provided by private investors or companies. They are secured by the property itself, so they can be easier to obtain for borrowers that have a less than perfect credit rating. If you’re a first home buyer and you plan to live in the property, government grants and loans can also be available but you need to look to your local government to see what you could be eligible for.
Market trends and timing
You may already know that real estate markets are cyclical. The timing of your current investment can significantly impact the return on that investment, so you have to understand the current market trends and the broader economic conditions that would influence them. Interest rates, for example, play a crucial role in real estate investing. When the rates are low, borrowing is often much more affordable, and property values tend to rise. Higher interest rates can also increase mortgage payments and reduce demand for property purchases.
When you’re analysing the market, you should also be analysing the supply and demand dynamics in the area where you are investing. In a sellers market, prices tend to rise because the demand exceeds supply. This makes it much harder for buyers to find affordable properties. On the flip side in a buyers market, supply exceeds demand, which means you may have more negotiating power and the opportunity to secure a much better deal.
The last thing to consider financially is the broader economic indicators, such as unemployment and employment rates, GDP growth, wage growth and inflation. All of these details can influence real estate market trends. You want to be able to make the best possible informed investment decisions, and avoid purchasing in a market that could face a downturn. Getting saved advice can really make a difference to you and your investment opportunities.
Risk management
The last consideration you really need to make is the fact that real estate investing comes with risks. The risks can happen in between fluctuated market conditions, tenant issues, unforeseen maintenance costs and more. High vacancy rates could hurt your investment, for example, especially if you’re relying on that rental income to cover your expenses.
Properties that require ongoing maintenance repairs and occasional upgrades may run into unexpected expenses. Budgeting for the expected is not easy, but you should always have a pool of money waiting. If you’re not going to be in a position to have that emergency fund backing you up, then real estate may not be for you.
Investing in real estate can be powerful especially if you’re looking to build wealth. But it’s not without its complexities, so to be able to succeed in this understand the investments, the location, and the financing options, all of which we’ve now gone through. With a sound investment strategy and the right advice at your shoulder, realistic can be a profitable and rewarding addition to your portfolio.