Stats reveal that 11% of Canadians were investment property owners in 2022, and an additional 26% were likely to invest in real estate over the next five years.
Real estate is a profitable investment vehicle that can generate predictable cash flow and add versatility to an investor’s portfolio.
However, like every other investment, you can only enjoy the perks of your investment if you have taken the necessary precautions and steps. With that being said, here are some factors to consider when investing in real estate.
1. Your budget
Before you begin the investment process, you must determine how much you have to spend. Therefore, it is vital to draw up a budget. Imagine investing in property that takes a chunk of your money and makes little to no returns!
This is a risk that could have been avoided if you had a better idea of the options you have available with the money you have allocated for real estate. With a budget, you can proactively invest in real estate, ensuring positive results.
When drawing up your budget, you should consider your long-term and short-term goals and break down the costs associated with investing in real estate. Additionally, be sure to accurately record your income to help you better plan your finances.
2. The type of property
Once you have prepared your budget, you can better understand how much you are willing to invest. Now, you can go on to the next step of exploring and determining the type of property you would like to invest in.
There are numerous types of properties you can invest in, such as residential and commercial real estate, raw land, real estate investment trusts (REITs), and real estate crowdfunding, to name a few. Each option would need different financial commitments, timelines, interest rates, and returns.
If you are looking at construction, such as rental properties like apartments and homes, consider the state of the building. Determining if you want a new or existing property affects your returns, the money needed to invest, and the associated costs of owning the building to ensure you reap profits.
3. Location of the property
Location is another vital aspect you must consider when investing in real estate. But how can you find the right location for your investment?
An effective solution to this problem is through market research. Through market research, you can determine highly demanded areas your targeted group is interested in. For example, you would want to invest in residential property in business districts to attract wealthy business owners. In this case, investing in an apartment unit within the St Regis Sunny Isles residence in Miami is a great idea!
You should also consider aiming for areas with higher tourist attractions or where college students live. Regardless of the location you select, ensure its proximity to basic amenities such as healthcare, the park, supermarkets, and means of exiting the town. These factors would further increase your property’s worth and make it more attractive— increasing your returns.
4. Valuation of the property
In simple terms, “property valuation” can be described as the present worth of property and the benefits associated with owning that property. Understandably, you want to ensure you are putting money into real estate that would reap a significant profit. If not, there is no point in the investment.
Additionally, property valuation is important as it assists the purchaser in carrying out an investment analysis to forecast the investment’s performance. There are three innovative ways you can ensure the valuation of your property. The first is the sales comparison approach which entails comparing the prices of two properties, usually a new and existing one, to determine the most valuable.
The other is the income approach, which is more suitable for rental properties as it looks at the projected profits the property will likely make. Lastly is the cost approach, which focuses on the cost of land and other property elements to determine its value.
5. Purpose of investment and expected return
Why are you investing in real estate property? Is it a form of passive income? Is it an investment in your family’s future? Property investment offers low liquidity.
It can be difficult to sell immediately to make your money back in cash. Therefore, if you want to make some rainy day income from your real estate investment, it would not be a good idea to start.
So, before you begin investing, search for the categories that would best suit your reasons for investing to ensure it is the right fit for you.