7 Things To Consider When Investing In Real Estate

The real estate market has moved away from the boom phase of the property cycle. Hyperinflation and rising interest rates mean a slump i.e., dropping property values and sales activity is anticipated. That said, there is an uptick in interest in real estate investing and the return of FOMO (fear of missing out) by first homebuyers keen to get onto the property ladder. While a downward market is not the perfect time for property speculation, astute investors will be securing their assets now and selling them later on when house prices go up.

In this article, we will take a look at smart investing and impulsive speculating, including:

• Analysing property deals
• Avoiding hype i.e. FOMO
• Buying just for capital gain
• Ignoring micro-market conditions
• Overlooking taxes e.g. capital gains tax
• Commercial real estate opportunities

1. Deal analysis

The most important thing in real estate investing is the deal analysis. When you know the numbers of a property deal, you’re not speculating. You’re making smart property investment decisions.

Deal Analysis

Before making an impulsive purchase, ensure you know the following before buying property.

• What to buy the property for, i.e., the sales price,
• how deposit is required,
• how much loan is needed,
• the weekly rent appraisal,
• approximate expenses, e.g. rates, insurance, maintenance,
• is the cash flow positive, neutral, or negative?

Most real estate investors buy and hold properties for rental income, so they don’t worry about capital gain. However, some events push people into believing they need to act or they will miss out, and this speculating activity was noticeable during GFC.

2. Getting caught up in the hype and excitement

Before the credit crisis, speculators were doing a lot of real estate deals and making handsome profits. The boom phase of the property cycle is the time for speculation. Buying real estate in distressed markets i.e. the slump or bust phase of the cycle are best left to the investors and avoided by speculators.

3. Banking on appreciation

Investing for appreciation and capital gain should be a long-term goal but not the only reason for doing the deal. In other words, it can be factored in as potential upside, but the property investment deal should stand up on cash flow analysis and that you have the right amount of equity in the sale too. Refer to the bullet points above to understand what you need to know about a real estate transaction to come out on the right side of the deal.

4. Trying to time the market perfectly

Some macro analysis will provide valuable information about whether it is time to get ready to buy or sell. Such information will undoubtedly improve the odds of success, but timing the market ideally can form the foundation of a strategy. Anything requiring a crystal ball falls into speculating rather than investing.

What is the direction of the real estate market? Some analysts expect prices to drop for some time due to the rippling effects of Covid-19. While others argue, prices might continue to appreciate especially with mortgage rates at an all-time low and record liquidity in the market.

5. Treating the markets as one big market

Real estate markets differ from region to region, and one problem with listening to commentators is that they are not usually referring to just a real estate market. They are generalizing using averages to support their opinion on market activity. Referring to medians and averages is acceptable to report trends, but a savvy investor knows that purchasing a property for rental income requires actual market knowledge.

Investors need to know the real estate sales activity in the area they are investing in. Smart investing is knowing what has sold recently and how much a property is worth.

Novice investors may speculate on their deals based on averages and medians and end up financially ruined,

6. Overlooking Taxes

Consider your tax liability on property purchases. Never assume there is no tax to pay when you do real estate deals. Your country may have land tax, mortgage tax on purchases, and capital gains tax on sales. Your deal may not look attractive once you’ve considered paying a 2 percent land tax on the purchase or a 15 percent capital gains tax on a sale.

7. Overlooking commercial real estate

While most real estate investors prefer residential deals requiring less capital, commercial real estate should not be overlooked if funds are available.

Due to the pandemic and recession investors who want to try their hand at commercial investing should find some fantastic commercial real estate on the market. Avoid rushing in; do your research before committing to a purchase. It is tempting to jump in and snatch a deal, but commercial real estate investing has different conditions. For example, you need more capital to put into the deal to get a loan. Commercial leases are not the same as residential tenancies.

The location is the same for residential and commercial real estate investing. Consult a business broker with local experience in selling businesses with property and analyzing why individual companies are moving to or moving away from an area.

Ecommerce and current market conditions can affect some areas more, but there will always be a need for prime commercial real estate.

Summary

With property investment, there is always some risk, but with knowledge of the local market, the economy, and when to use strategies like flipping or buy and hold, i.e., a rental property you can succeed.