What’s the most important thing to look for in real estate? While location is always a key consideration, there are numerous other factors that help determine if an investment is right for you. Here’s a look at some of the most important things to consider if you plan to invest in the real estate market.
1. Property Location
Why It’s Important
The adage “location, location, location” is still king and continues to be the most important factor for profitability in real estate investing. Proximity to amenities, green space, scenic views, and the neighbourhood’s status factor prominently into residential property valuations. Closeness to markets, warehouses, transport hubs, freeways, and tax-exempt areas play an important role in commercial property valuations.
2. Valuation of the Property
Why It’s Important
Property valuation is important for financing during the purchase, listing price, investment analysis, insurance, and taxation—they all depend on real estate valuation.
What to Look For
Commonly used real estate valuation methods include:
Sales comparison approach: recent comparable sales of properties with similar characteristics—most common and suitable for both new and old properties
Cost approach: the cost of the land and construction, minus depreciation— suitable for new construction
Income approach: based on expected cash inflows—suitable for rentals
3. Investment Purpose and Investment Horizon
Why It’s Important
Given the low liquidity and high-value investment in real estate, a lack of clarity on purpose may lead to unexpected results, including financial distress—especially if the investment is mortgaged.
What to Look For
Identify which of the following broad categories suits your purpose, and then plan accordingly:
Buy and self-use. Here you will save on rent and have the benefit of self-utilization, while also getting value appreciation.
Buy and lease. This offers regular income and long-term value appreciation. However, the temperament to be a landlord is needed to handle possible disputes and legal issues, manage tenants, repair work, etc.
Buy and sell (short-term). This is generally for quick, small to medium profit—the typical property is under construction and sold at a profit on completion.
Buy and sell (long-term). This is generally focused on large intrinsic value appreciation over a long period. This offers alternatives to compliment long-term goals, such as retirement.
4. Expected Cash Flows and Profit Opportunities
Why It’s Important
Cash flow refers to how much money is left after expenses. Positive cash flow is key to a good rate of return on an investment property.
What to Look For
Develop projections for the following modes of profit and expenses:
Expected cash flow from rental income (inflation favours landlords for rental income)
Expected increase in intrinsic value due to long-term price appreciation.
Benefits of depreciation (and available tax benefits)
Cost-benefit analysis of renovation before sale to get a better price
Cost-benefit analysis of mortgaged loans vs. value appreciation
5. Be Careful with Leverage
Why It’s Important
Loans are convenient, but they may come at a big cost. You commit your future income to get utility today at the cost of interest spread across many years. Be sure you understand how to handle loans of this nature and avoid high levels of debt or what they call over-leverage. Even experts in real estate are challenged by over-leverage in times of adverse market conditions and the liquidity shortages with high debt obligations can break real estate projects.
6. New Construction vs. Existing Property
Why It’s Important
New construction usually offers attractive pricing, the option to customize, and modern amenities. Risks include delays, increased costs, and the unknowns of a newly-developed neighbourhood.
Existing properties offer convenience, faster access, established improvements (utilities, landscaping, etc.), and in many cases, lower costs.
What to Look For
Here are some key things to look for when deciding between a new construction or an existing property:
Review past projects and research the construction company’s reputation for new investments.
Review property deeds, recent surveys, and appraisal reports for existing properties.
Consider monthly maintenance costs, outstanding dues, and taxes. Costs such as these can severely impact your cash flow.
When investing in leased property, find out if the property is rent-controlled, rent-stabilized, or free market. Is the lease about to expire? Are renewal options favourable to the tenant? Who owns the furnishings?
Quality-check items (furniture, fixtures, and equipment) if these are to be included in the sale.
7. Indirect Investments in Real Estate
Why It’s Important
Managing physical properties over a long-term horizon is not for everyone. Alternatives exist that allow you to invest in the real estate sector indirectly.
8. Overall Real Estate Market
Why It’s Important
As with other types of investments, it’s good to buy low and sell high. Real estate markets fluctuate, and it pays to be aware of trends. It’s also important to pay attention to mortgage rates so you can lower your financing costs, if possible.
Real estate can help diversify your portfolio. In general, real estate has a low correlation with other major asset classes—so when stocks are down, real estate is often up. A real estate investment can also provide steady cash flow, substantial appreciation, tax advantages, and competitive risk-adjusted returns, making it a sound investment.
Of course, just like any investment, it’s important to consider certain factors, like the ones listed here, before you invest in real estate—whether you opt for physical property, or something else.