Investing in real estate has a relatively favourable risk/reward profile. Correctly done, it can offer substantial returns on investment. It has a high degree of liquidity, as it is relatively easy to enter and exit from the property.
Even so, it makes sense to consider several factors before you make any investment in property. To start with, the location of the property is one of the most important factors that can assure profitability. For commercial properties, the proximity to markets, transport hubs, warehouses, tax-exempt areas, and freeways can be important to give them the needed valuation. In the case of homes and rentable property, their nearness to amenities, the status of the neighbourhood, views, and crime-free areas can greatly enhance their values. Take a long term view when you are looking at property and also understand how the property and the areas around it will evolve over time.
Valuation of the property is another consideration that can play a big role in deciding the investment. Compare sales made of properties that have similar characteristics. Use a cost summation less depreciation for new properties. If you are planning to rent or lease the property, look at the cash flow it can generate, the cost and hassle of managing the property, and its demand, which can largely be dictated by location and affordability.
Property investment is a high-value investment that has low liquidity and can lead to financial distress at times when properties are financed through mortgages. You must be clear about the purpose of your investment, which can be for self-use, for leasing, for flipping, or for holding long term till it can fetch a good price. Investment in the property must have you always looking out for expected cash flows for leased properties or for property opportunities in case of property that you want to sell. You can also lease out a property until the time you find a good opportunity to sell it. Look at benefits that you can get from depreciation. Carry out a constant cost-benefit analysis when you have used a mortgage for financing, and compare it with any appreciation in value.
If you have used loans to make the investment in property, consider the cost of interest spread over the years, and how this is affecting any profit or benefit that you will derive from the property that you have invested in. Choose the right type of mortgage, fixed-rate, adjustable-rate, interest-only or others that fit the financial situation you are in.
You can invest in a property that is being resold or choose to buy into new construction. For older properties look at maintenance costs, taxes, outstandings and other expenses that can impact your cash flow. In case of new construction, besides considering the important location aspect, also look at the reputation of the construction company and its record in previous projects. Let costs alone not be your sole criterion for the investment.
You can always invest in property indirectly through stocks in real estate companies, or real estate mutual funds, REITs, mortgage bonds or other such financial instruments.