Investing In Real Estate For Beginners

Thinking about investing in real estate? Done right, real estate investing can be lucrative. It can help diversify your existing investment portfolio and be an additional income stream.

Investment purpose

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. Identify which investment path suits your purpose, and then plan accordingly.

Location

Location is 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.

Evaluating whether to buy property

It is essential to learn evaluation techniques to determine the suitability of properties for your investment portfolio. Generally, prospective investors visit the properties, research neighbourhoods and pay close attention to the data provided in comparative market analyses (CMA). Finally, get the calculation tools necessary to compare properties and determine their profit potential. Another key consideration is the mid-to-long-term view regarding how the area is expected to evolve over the investment period.

Valuation of property

Property valuation is extremely important for financing during the purchase, investment analysis, insurance and taxation. Some of the more commonly used real estate valuation methods that you need to be familiar with include:

  • Sales comparison approach – recent comparable sales of properties with similar characteristics.
  • Cost approach – the cost of the land and construction.
  • Income approach – based on expected cash inflows.

Your credit score

Your credit score affects your ability to qualify for a mortgage, and it impacts the terms your lender offers. If you have a higher credit score, you may get better terms – which can add up to substantial savings over time. Work on improving your credit score by:

  1. Paying your bills on time
  2. Paying down debt
  3. Aiming for no more than 30% credit utilisation
  4. Limiting requests for new credit and “hard” enquiries
  5. Reviewing your credit report and dispute inaccuracies

Know the pitfalls of leverage

Buying property with little or no down payment is an appealing prospect, but there are major pitfalls to this strategy. Leverage is borrowing because an investor does not have enough cash available to acquire an asset. Be sure you understand how to handle loans of this nature and avoid high levels of debt or over-leverage. Though leverage can increase the amount of property an investor can purchase, don’t use debt without knowing the associated risks.

New construction vs existing property

New constructions usually offer attractive pricing, the option to customise, and modern amenities. However, risks include delays, increased costs, and the unknowns of a newly developed neighbourhood. On the other hand, existing properties offer convenience, faster access, established improvements, and in many cases, lower costs.

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