Top Eight Factors to Consider When Investing in Real Estate

In 2019, about 5.34 million homes were sold in the United States. Real estate is indeed a very lucrative sector that can earn you fortunes. Just like other types of investments, real estate has several risks. Therefore, it must be approached with adequate knowledge in the field. 

Regardless of the type of property you want to buy, passive real estate investing requires a lot of research, to ensure maximum profits and prevention of losses occasioned by investing in the wrong property. Below are some of the things to consider before investing in real estate.

1. Research the market

Doing proper research on the real estate investment requirements will help you understand the house prices, the best locations to buy, Interest rates, which types of property are doing well, among others.

Your types of clients can help you a lot when it comes to choosing a location. Make sure the location is attractive to increase your chances of getting high returns. You can consider areas with high tourism rates, property value, and good infrastructure. 

2. Type of property

The type of property you choose is critical in real estate investing as it can make or break your bank account. 

Your choice of property can either be rental or to-buy properties, residential or commercial properties. If you go for residentials, the next question should be whether to go for established or new builds. New buildings, however, tend to require more input than the established ones. 

Properties can also be divided into small or large, high end or low end, luxury, and non-luxury. Luxury properties provide more security and are not affected by market fluctuations like other types of properties. 

You can also choose to invest in:

3. Single Family Home or Condominium

When deciding whether to invest in a single-family home or a condominium, you should analyze their return on investment, maintenance costs, tenant turnover, among other factors. Single-family homes tend to have lower cash on cash returns, require more maintenance and have a much lower tenant turnover than condominium properties. Keeping your tenants for long is suitable for property profits.

4. Airbnb Investment

Investing in this kind of property comes with both advantages and disadvantages. Airbnb’s advantage is that it can bring more profits than renting the same property to a single long-term tenant. 

The diversified portfolio of tenants in Airbnb rentals reduces the risk of unpaid rents, since each tenant represents a small fraction of the total income, therefore, it may not have a significant impact on the investment. 

The Airbnb investment, however, requires high running costs than having a single tenant. The costs include high-quality furniture, appliances, décor, food, and WIFI connection.

5. Long-term versus Short-term Returns

Before you invest in real estate, it’s essential to determine your goals. You should ask yourself whether you need quick returns, or the returns can be long term. 

Short term returns can be found from buy-to-sell and fix-and-flip opportunities. Though these kinds of investments provide high returns, they come with much-added risks. Investing in holiday lets can also give you quick returns. Rental properties are suitable for long term gains.

You should Diversify your investment in different kinds of properties to mitigate risks and increase your returns. 

6. Credit Score

You need a good credit score to finance your investment. The approval and interest of your loan will largely depend on your credit score. 

Mortgage lenders depend on the credit information to know if you will default payment or not. If your credit score is not right, the lender will consider you a risk, and your loan application will be disapproved. 

7. Down Payment vs. Private Mortgage Insurance

Several options are available whenever you need funds for your real estate investment. To qualify for an investor mortgage, you need a down payment of twenty percent of the property sale price. 

However, this percentage can be higher, depending on the lender and your financial situation. A higher down payment is reasonable as it leads to lower monthly payments and interest costs.

A private mortgage insurance policy protects lenders from the risk of default, allowing buyers without a significant down payment, to get mortgage financing at affordable rates. 

8. Have a Realistic Budget

The risks involved in real estate investment can be so high; therefore, it is critical to have a realistic budget to avoid losing too much money if the investment goes south.

For a first investment, you can keep the investment as low as possible to stay safe. You can also go for houses in the low to mid-range price brackets. This price range is excellent for houses that still need renovation before renting or selling. 

9. Property Inspection

Having a professional inspect the property you want to buy will allow you to identify any significant issues with it. 

The inspector can look for issues related to safety. Fire safety inspection can be done by inspecting smoke detectors and the wall to ensure it has the proper fire rating. A property inspection can be done in areas such as foundation, kitchen appliances, laundry room, and bathrooms.

Inspection can also be conducted to find any issues with plumbing, electrical wiring and other gadgets like the HVAC system. 

In the plumbing system, the inspector will test for water pressure, check the showers and the pipes, to identify any leakage. In the HVAC system, the inspection will look at the furnace and air conditioner and determine whether they function correctly. In case they are faulty, the inspector will give you a report and recommendations for maintenance or repairs. 

10. Hire a Good Realtor

Real estate investing requires a lot of time, information, and research, which can overwhelm you as an investor. You can, therefore, look for the services of a realtor to reduce the burden. However, some people avoid working with real estate agents due to the high fees and bad experiences they had with them.