Real estate has always been regarded as a highly effective method for wealth generation. Over the years, it’s become a sustainable way to ensure higher future returns and asset appreciation. However, the promising benefits of owning a real estate asset can often make people unaware of the risks, leading to poor investment choices without careful consideration.
Above all, it’s imperative that your real estate investments maintain their value, and hopefully appreciate over time. While factors like location and asset types are primary considerations, it is crucial to know what metrics to look for in committing to a successful investment.
Here are a few signs that clearly indicate a successful real estate investment:
1. The location of the property
The location’s profitability is important in determining if the investment has been worth it. Notably, as residential and commercial properties have different expectations from location, they must be carefully considered to ensure the property’s potential is being analyzed to the fullest.
In the case of residential property, accessibility to amenities, local shopping areas, and proximity to nearby transportation hubs are paramount. Meanwhile, for commercial property, closeness to warehouses, tax-exempt zones, markets, and transportation hub accessibility is important.
You should also take into account if there are any issues in the area as well. With commercial properties, there is a chance that a problem with birds nesting on the outside of the building can happen. If this is evident, you can call in bird control auckland services, or services within the buildings location, so deterrents can be put there to reduce this occurring. It may not stop you from buying as there is a solution to it, but you still need to be thorough when researching these areas.
Analyzing the selected area on a mid-to-long-term basis can help evaluate if the investment is worth it.
2. The cash flow curve
Cash flow indicates the money that is left after expenses have been cleared. Positive cash flow indicates growth and that the current financial standpoint is able to meet financial obligations. On the other hand, a negative cash flow can severely impact opportunities and will halt the property’s growth potential.
Additionally, as factors like rent, taxes, and expenses contribute to factors to the cash flow of a property, it is important to constantly identify opportunities such as renting, tax benefits, renovation and repair work’s cost-benefit analysis and appreciation value vs the mortgage loan on the property, the expected intrinsic value increase. If these factors are favorable, then your property will yield positive cash flow.
3. The Purpose of the Investment
Not all real estate investments are meant to be personal. Many people choose to invest in real estate as a way to create future security for themselves, while for others, it’s a dream come true. Understanding your investment’s purpose will help maximize the property’s potential and gain more value from it.
Buying for self-use, buying for lease purposes, or simply buying and selling (over a short or long period) are some ways people add a purpose to their investments. Without a purpose, you may subject yourself to financial distress. If you are not sure why you want to invest, it is best to wait for some time and find your reason.
4. Whether the property diversifies your portfolio:
Diversifying your property investment portfolio effectively lowers your chances of getting tangled with risks while having leverage over property appreciation. If a property is adding more diversity to your portfolio, it is certainly worthy of the investment that you are making.
5. The property’s valuation:
Valuation of the property plays a vital role in determining the financing options you will need, the listing price, the insurance rates, and applicable taxation on the property.
Property valuation helps ascertain if the property is worthy and if the price reflects the property’s true potential in the market. There are three approaches that are commonly used to determine the value of a property, these are:
- Based on the rent, the property will be able to be drawn in.
- Based on how properties with similar characteristics have sold in the surrounding area.
- Based on the cost of construction and land where depreciation is excluded.
Identifying potential to derive value from investments
Investing in a property is a long process, considering there are various factors to evaluate. However, merely getting all these parameters right is not enough to get the most from your investment.
While positive cash flow ensures your property still holds a competitive edge in the market, the nature of diversity it adds to your portfolio will surely ensure that you are less vulnerable to risks. Additionally, it is always advisable to keep looking for opportunities your property can help unlock.