In the last few decades ever more of us have started to invest in real estate. Arguably the appeal of sinking money into property has grown since the economic crash, as many traditional savings accounts and investment opportunities have offered ever-dwindling returns.
However, it would be a mistake to think that investing in property offers guaranteed riches. Quite the opposite; as competition for suitable properties has grown, so sourcing the right opportunity that stacks up financially has become ever more challenging.
If you’re considering making the shift from savings to real estate investing here are five of the biggest factors to consider before you purchase your first rental property…
While the 1980’s and 90’s saw generally predictable, consistent growth in real estate values and financing opportunities this has all changed now. Since the financial crash, and the sub-prime mortgage debacle, we have seen far greater variability in the property market. With Brexit and a Trump presidency on the horizon we can most likely expect yet more significant changes in the near future.
Your first consideration should therefore be to educate yourself about the property market as a whole, so that you can make decisions that aren’t just right for today – but also factor in your assumptions about the future.
It seems likely that this variability could result in falling (or at least stagnant) real estate values over the next few years. These price oscillations could also be affected by changes to how property investments are taxed, inflation and interest rates.
It would seem, therefore, that investing in a “just profitable” deal right now has the potential to go south in the coming years. Instead, it makes sense to “weather the storm” by running a number of simulations before buying. Be certain that changes to the financial landscape wouldn’t put you in the red on a monthly basis.
Location, Location, Location
Real estate prices are hardly uniform across the whole country. In North America it’s no secret that prices in areas like New York and San Diego are considerably above more rural areas. Britain experiences similar variances, with London being far more expensive than northern cities like Liverpool.
But it’s not just prices that you should be considering; also look for signs that could result in prices rising in the near future. Examples could include major new highways being built, new rail systems or large companies opening in a certain area. All of these elements can make a location more desirable, leading to increased property prices going forward.
Many companies publish data on their expected rental returns by area. Try to consult these, looking for the patterns between them, and use these as a potential guide for healthier returns.
How do you plan to finance your property investment empire? Many investors use outside sources of finance, such as mortgages for rental properties. Interestingly, such financing options can be quite different to traditional residential mortgages, and may require a higher deposit or some other kind of collateral.
It pays, therefore, to investigate all the possible options available to you, in order to not only get the cheapest financing possible (meaning easier profits) but also to consider what a change to your interest rate would do for your returns.
An increasingly popular option is to buy a property for cash. Of course, for many of us this is only possible in the cheaper parts of the world, but does remove the risk that bank funding comes with.
After all, you can forget about worries over mortgage interest rates changing. It also becomes far more difficult to get into a financial mess, if you own a property outright. Worst case scenario you could simply keep the property for some years to come, and then sell it when the real estate market returns to consistent growth.
Many people view real estate as a passive investment; you buy the property and then the rent keeps rolling in for years into the future. However, experienced real estate investors will tell you that this is far from the truth.
Tenants must be found and vetted. Rent must be collected. Paperwork must be done, to prove that you are meeting your legal obligations as a landlord. And of course the property itself must be maintained and repaired as necessary; anything from replacing broken windows to fixing blocked toilets.
A further consideration when investing in real estate for the first time is therefore who is going to do all this ongoing maintenance. If it’ll be you then you’ll ideally need to live close to your rental property, have the flexibility to attend as and when necessary, and the skills to carry out work (or at least instruct someone else to do it for you).
Alternatively you may opt to hire a managing agent, so that your investment really does become hands-free. Under these circumstances, however, you’ll typically pay anywhere between 10% and 15% of the rental income as a management fee – which must be factored into your spreadsheet to ensure profitability.
Income Vs. Capital Growth
One final thought is why you’re investing. Some real estate investors, for example, buy properties with an aim to earn an ongoing, passive income. Each property is purchased with a very specific view to producing some income, no matter how small.
The size of this income will vary greatly, with area, property type and more. Remember that a small profit can quite easily be eaten up with management, or changes to the property market. The upside of such properties is that this ongoing income can then be used to fund further real estate acquisitions if you are so inclined. In this way, one property investment can become many.
Others, however, invest for capital growth. That is to say that the rental income only needs to cover their mortgage payments; monthly profits are not a concern. These investors use the strategy of capital growth; they aim to hold a property for long enough that it goes up in value and can then be sold at a profit.