Why invest in Real Estate? … Part 1
Real estate investments will appreciate over time, thus increases its net worth through the years.
For years now, I have been thrown questions like “What should I invest in?”, Should I put my money in bonds and shares?”, “Is it correct that Bank Fixed Deposits are most secure?”. Whenever I receive these questions, my reply has always been the same – Investing in Real Estate is your best bet!
Real estate investments are one of the most secure types of investing. It is a fact that stocks and bonds can be badly affected by recessions, as experienced during 2008. Real estate on the other hand, has the capacity to increase in value over time despite economic fluctuation.
Here are three methods you can use to make your real estate earn profits for you – acquiring, selling, and renting it out.
There are several different methods through which you can earn profit or income from real estate. First is by making it a desirable collateral for loans. The earning capacities for valued properties make it an attractive mortgage subject for banks and other financial institutions.
Real estate investments will appreciate over time, thus increases its net worth through the years. Not to forget, this form of investment has the ability to generate good cash flow, which you can spend after you have paid up your loans and other expenses incurred such as your property maintenance.
Furthermore, real estate investment is an investment that allows you to have a “say” on what happens to it. You can decide what to do with the investment and not just let others do the thinking for you as what happens with stocks and the share market, where a board of directors generally does the overall decisions for your investments.
Location, location, location…yes location matters
Where you choose your real estate investment is important as there are some factors to consider. Basically what you have to consider would be the type of property that you purchase, its size and how much of effort you invest in managing the property.
If you purchase a property that is closer to you, you may open the doors to your tenants appearing at your doorstep almost all of the time. They will be there to vent their problems and frustrations that they may be experiencing at your property. This can be quite bothersome, as you really do not want to hear every trivial thing that may be happening at the property, which has no significance with you as the owner.
However, it will be ideal to invest in smaller properties that are relatively close to home, as it requires lesser management as it can be constantly checked for problems that may require your attention. These type of properties are small enough that it can be managed single-handedly by the owner himself and does not require the help of professionals.
Furthermore, if a prospective tenant were to come by, you will be able to show him or her the said property without taking much time off your daily schedule. Such properties should not take hours for you to get to.
In direct contrast, investing in larger properties gives you the allowance for the property to even be located outside the country. These types of property would require the engagement of experienced professionals that will manage the property in your absence. This will allow the owner (you) to have peace of mind as you are assured that a capable individual or company is running your investment. This is why such properties can be located at farther places.
What Type of Properties to Invest in?
Once I get to this point in conversation about real estate investment, the next question I am always faced with is “So what type of property should I put my investment in?”
A lot of people get confused if they should put their money in commercial leasing spaces such as office and warehouse units, or should they choose to buy an apartment?
In my opinion, as far as cash flow is concerned, the best property to buy would be apartment buildings, may it be a condominium, apartment or even flats to a certain extend. There are several factors, whichmake it the best property to acquire compared to the rest.
Firstly, apartments can be acquired relatively cheaper than other types of real estate such as landed houses, office lots or even shop houses. It have a lower premium compared to other real estate investments.
The second factor to look at is the known fact that apartment rental income is not affected by ‘in season’ and ‘off season’ business cycles. Having a roof above your head is one of the most basic needs of a human being. This makes the demand for such units to almost never diminish.
In many circumstances, landlords of stratified units who lose a tenant today, almost instantaneously find a replacement.
Next, you need shouldn’t oversee the fact that apartments bring you a regular source of income. Since apartments are rented out for shorter durations such as 12 to 24 months at a time, the owner will be able to change the rental fee if there is any fluctuation in the market. Furthermore, apartment complexes also have an edge other types of real estate as most strata developments such as condominiums, serviced apartments and some mid range apartments come with additional recreational facilities which appeals to potential occupants.
How to Evaluate and Estimate a Property Value?
The first thing that you would need to know when choosing a property to buy is its value. Determining the property value is crucial to your overall investment.
First, you need to understand the fact that a property’s value largely depends on how much income it is able to generate over the course of a full year. This is called the property’s annual rental income. There is a formula that is used in order to determine this value:
Property Value = Annual Rental Income/ Capital Rate
A property’s capital rate will depend on its location and also in its type. To get the current and most accurate rate, you should know the prevailing market rental income for the type of property that you want to invest in and also the current market-selling rate of the property. Through this method, you will be able to know if the property is being sold at a fair rate or is overpriced.
In order to know if it is worth your investment, you should also evaluate if the said property has potential to provide you with profitable income that will assure you extra cash after you have deducted mortgage payments as well as other expenses that you will incur for the property’s operations and maintenance.
Stay tuned next week for Part 2, where we will dive into the area of real estate agents, options to invest in cheaper properties if you are on a budget as well as purchasing property through bank loans or cold hard cash.