10 Tips for Picking the Best Real Estate Investment
If you’re looking to diversify your investment holdings, real estate can be an excellent choice. The initial buy-in cost can be higher than it is for other types of investments, but if you take the time to research and explore your options, the initial cost can easily be overcome. The advantages of real estate investing are numerous, especially for rental properties. You’ll be able to use income from renting to cover the myriad costs associated with property ownership, including taxes, repairs, Real Estate Property Management expenses and loan payments. If you make careful and considered decisions about what property to buy, what loans to take out and how to manage your new investment, you can even start to see returns quickly.
Getting into investment properties can be tricky, but these 10 tips can help you navigate the complexity and reap the rewards of owning a Rental Property.
1. Choose your location carefully.
When you’re looking for a property to purchase, keep in mind that the value you can glean from your investment will be based, at least in part, on how desirable that property looks to potential tenants. This means that location is key. People tend to look for an apartment or other rental housing that’s situated near work to cut down on the hassle of commuting, which means that property close to cities tends to be in higher demand. Try looking for rentals within a ten-kilometer radius of the CBD. If you’re willing to take on a bit of risk, it may also be worth investing in an area that’s likely to see substantial growth in the coming months or years, such as near a factory that’s under construction.
2. Look for a property that’s close to public transportation.
Once you’ve settled on the general area you want to target for your investment, it’s time to start narrowing down your options. Access to public transportation is important for many people, especially ones who are considering renting a place in a more populated area where parking is difficult and expensive. Ideally, an investment property is within a 10- or 12-minute walk of public transportation. Be wary of locations that are adjacent to stations or on main roads, however. The noise and traffic associated with those spots can be a turnoff for some tenants who place a high value on privacy and quiet.
3. Stay close to other amenities, too.
Public transportation isn’t the only thing to keep in mind when you’re narrowing down your list of potential properties. Easy access to shops, restaurants, gyms and other amenities can also make a property more desirable to potential tenants. This should be weighed carefully against the general location and access to public transportation to get a big-picture look at how different properties compare. They’re the factors, along with the age and condition of the building and on-property features, that will determine how much demand exists in the rental market, and higher demand means higher rent.
4. Keep scarcity, or supply and demand, in mind when evaluating properties.
Location is a key factor in determining the demand that will exist for a property. Availability of rentals in the immediate area determines supply. Imagine two dwellings that are a short walk to public transportation and close to exciting shops and restaurants. Both of them are going to be in demand — they’re well-situated in a thriving area. Near of them, there are only a few other apartments or houses. Near the other, there’s a large complex with more than a dozen available rentals. The first residence is probably going to be a better investment. While the demand is similar for both, the supply is lower for the first one, which means more competition among tenants to secure a spot. That competition translates into higher rent prices and more favourable rental terms for the owner.
5. Take some time to research the area.
Before committing to an investment property, make sure you understand the neighbourhood. This is especially important if you’re considering a property that’s in an area where you don’t spend a lot of time. Investigate the area’s real estate market, including average rent, rental rates and information on home sales. Find out if there are any large development plans in the works, including shopping complexes, factories or large office buildings, or new apartments. New construction can impact the value of your investment, and it’s better to do some research ahead of time rather than discover a nasty surprise before you’ve had time to recoup your investment. The council’s planning office will be able to provide details on any upcoming projects, and you may want to spend a bit of time investigating other sources as well.
6. Avoid off-the-plan properties.
Off-the-plan properties are properties that share features with each other. They’re often built at the same time by the same developer, and often have very similar, if not identical, designs. Because they’re so similar, they’re often cheaper to build, which means that they’re cheaper to buy. This may seem like an upside, but it rarely is. Off-the-plan properties, by their nature, usually lack scarcity. They’re often clustered together, and they tend to go to market at similar times when construction is finished or leases expire. Because of this, it’s difficult to leverage the location and amenities the property offers — there’s too much competition among property owners to attract tenants.
7. Be wary of rental return guarantees.
These programs can be complex. The basic idea behind them is that you put up the money for a property, such as an apartment in a new complex, and agree to rent it back to the developer, who then fills the apartment with a tenant and pays you a set amount per month for the privilege. On the surface, this seems similar to using a Real Estate Property Management service, but there are some significant pitfalls. For example, you may have no control over tenants, maintenance and repairs, or the agreements may contain other disadvantageous clauses.
Apart from these risks, the biggest reason you should avoid rental return guarantees is that they’re a worse investment. Many developers use them as a way to raise capital for a project by providing sales evidence to the bank, but any concession is built into the purchase price. This means that whilst you will get paid a guaranteed rental, you have usually already paid for it yourself with an inflated purchase price. Often it can take some years before the property reaches the price paid. These agreements can seem like a good idea, but you’re likely to be better off if you go the more traditional route of Property Management, avoid these schemes altogether.
8. Strike a balance between price, property and position.
These three factors, price, property and position, are all weighed against each other. An excellent investment property in the perfect area is going to be extremely expensive. Rent will have to be high, which limits the pool of potential tenants. On the other hand, an inexpensive, older property in an outer suburb will attract a different type of tenant. When you’re considering a property for an investment, make sure that you consider all three of these factors together, rather than separately, and think about how they align, especially in the context of your idea tenant.
9. Remember that you’re shopping for your ideal tenant.
When you’re touring investment properties, remember that you’re not shopping for a residence for yourself. Instead, you’re trying to find a property that will appeal to the kind of tenant that you want to manage and that has the largest potential to increase in value quickly. This means that you may find yourself investing in an older property in an area that you think is going to explode in popularity in the next several years, even though you prefer a place that takes advantage of the latest technology. It can be both fun and tempting to consider whether you would want to live at the new location, but that’s not going to help you with your investment goals in the long term, and it shouldn’t impact your decisions.
10. Pay careful attention to your loan terms.
Once you’ve chosen an investment property, there are several ways to raise capital. You may have money that you need to invest, or you may have to shop around for a loan. If you take the loan route, make sure that you pay careful attention to the details. A poorly chosen loan can be the difference between a profitable investment property venture and an expensive one.
One specific option to keep in mind is the interest-only loan. Instead of paying toward the principle of the mortgage, you’ll only make an interest payment every month for a set amount of time, usually around five years. After that time is up, you may be able to refinance the loan, pay off the principle in a lump sum, or continue making payments that include the principle. These can be a good option if you plan on purchasing several properties, as the repayment levels are lower than on a principal & interest loan, thus increasing your ability to service further loans.
Managing Your Investment
Once you’ve closed on your investment property, it’s time to start managing it. You can do this on your own, but it’s a significant time commitment that may distract you from your day job or other investment endeavours. As an alternative, you can choose a property manager to handle all of the details for you, including finding tenants and handling repairs. Stanley Samuels is a Property Management company in Adelaide with expert knowledge developed during many years of experience in the industry. There are fees associated with Property Management, but they take the place of the time, energy and money you would otherwise have to spend marketing your property and communicating with tenants. Professional management is the first choice of many top real estate investors.