What’s the most important thing to look for in real estate? While the location is always a key consideration, there are numerous other factors that help determine if an investment is right for you. Here’s a look at some of the most important things to consider if you plan to invest in the real estate market.
1. Property Location
Why It’s Important
The adage “location, location, location” is still king and continues to be the most important factor for profitability in real estate investing. Proximity to amenities, green space, scenic views, and the neighborhood’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.
What to Look For
A key when considering property location is the mid-to-long-term view regarding how the area is expected to evolve over the investment period. For example, today’s peaceful open land at the back of a residential building could someday become a noisy manufacturing facility, diminishing its value. Thoroughly review the ownership and intended usage of the immediate areas where you plan to invest.
One way to collect information about what are the prospects of the vicinity of the property you are considering is to contact the public agencies in charge of zoning and urban planning. This will give you access to the long-term area planning and make a determination of how favorable or unfavorable your own plan for the property.
2. Valuation of the Property
Why It’s Important
Property valuation is important for financing during the purchase, listing price, investment analysis, insurance, and taxation—they all depend on real estate valuation.
What to Look For
Commonly used real estate valuation methods include:
- Sales comparison approach: recent comparable sales of properties with similar characteristics—most common and suitable for both new and old properties
- Cost approach: the cost of the land and construction, minus depreciation— suitable for new construction
- Income approach: based on expected cash inflows—suitable for rentals.
3. Investment Purpose and Investment Horizon
Why It’s Important
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.
What to Look For
Identify which of the following broad categories suits your purpose, and then plan accordingly:
- Buy and self-use. Here you will save on rent and have the benefit of self-utilization, while also getting value appreciation.
- Buy and lease. This offers regular income and long-term value appreciation. However, the temperament to be a landlord is needed to handle possible disputes and legal issues, manage tenants, repair work, etc.
- Buy and sell (short-term). This is generally for quick, small to medium profit—the typical property is under construction and sold at a profit on completion.
- Buy and sell (long-term). This is generally focused on large intrinsic value appreciation over a long period. This offers alternatives to complement long-term goals, such as retirement.
4. Expected Cash Flows and Profit Opportunities
Why It’s Important
Cash flow refers to how much money is left after expenses. Positive cash flow is key to a good rate of return on an investment property.
What to Look For
Develop projections for the following modes of profit and expenses:
- Expected cash flow from rental income (inflation favors landlords for rental income)
- The expected increase in intrinsic value is due to long-term price appreciation.
- Benefits of depreciation (and available tax benefits)
- Cost-benefit analysis of renovation before sale to get a better price
- Cost-benefit analysis of mortgaged loans vs. value appreciation
