The real estate market is undergoing changes brought by the economic impact of the coronavirus; many markets have moved through phases of the property cycle and are facing a long time in a slump. That said there is an uptick in interest in real estate investing and novice investors should avoid impulsive behaviour, i.e. “jumping in” or speculation.
In this article, we will take a look at the differences between smart investing and impulsive speculating.
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.
Before making an impulsive purchase, make sure you know the following before you buy a 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 the rental income, so they don’t worry about the appreciation aka capital gain. However, some events push people into believing they have 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, aka 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, so you 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 the category of 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 fine to report trends, but a smart investor knows that purchasing a property for the rental income requires real market knowledge.
Investors need to know the sales activity of real estate in the area they are investing in. Smart investing is knowing what has sold recently that comparable and how much a property is worth.
Novice investors may end up speculating 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 so attractive once you’ve considered paying a 2 per cent land tax on the purchase or a 15 per cent capital gains tax on a sale.
7. Overlooking commercial real estate
While most real estate investors prefer residential real estate deals as they require 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 a very tempting time 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.
What is the same for both residential and commercial real estate investing is location. Consult a business broker with local experience in selling businesses with property and analyzing why individual companies 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.
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.
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