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What should a real estate investor consider before buying an object?

09.10.2024
Homesoverseas.ru editorial office
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We continue the series of publications on real estate investments; What parameters should be evaluated before investing in a particular object, the specialized Australian edition of Property Buyer told; We have prepared a translation for our readers.

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1. Location in a broad and narrow sense

Location is a fundamental characteristic of real estate. It is even more important for investment transactions. The correctly selected region and location will ensure:

  • Stable capital growth:Real estate in sought-after locations tends to increase in value over time.
  • Constant demand for rent:Areas with good infrastructure, employment opportunities and an active life attract tenants.

When evaluating a particular place, pay attention to:

  • Distance from infrastructure facilities:Are schools, parks, public transport stops and popular shops close?
  • Noise level and traffic flow:Is the house located on a quiet street or on a busy thoroughfare?
  • Future development potential:Can the construction of any buildings nearby negatively affect the value of real estate?

2. Price/availability

Never choose a property based solely on price.The price should be considered as a relative value, indicating whether the area and the selected apartment have the potential for capital gains and high rental yields.

This concept is easy to test on "bridesmaids" areas adjacent to famous, sought-after places. In such locations, you can find relatively affordable options that have the infrastructure of neighboring elite neighborhoods at their disposal. The main thing is to identify areas that offer accessibility without compromising growth potential.

3. Rental income/cash flow

When choosing a property for investment, the most important parameter is the possible income from renting it out. This indicator is expressed as a percentage and is calculated by dividing your annual rental income by the cost of the property.

For example, an apartment costs $500,000, it rents for $400 a week, bringing in $20,800 a year. Thus, the rental income is: 20,800 & divide; 500,000 = 0.0416 or 4.16%.

As a rule, properties with high rental yields have less potential for capital gains (value increases) over time. If you need a high and stable income to cover loan repayments, it may be wise to prioritize properties with high rental income. However, this may mean that you will have to sacrifice some long-term capital gains potential.

4. Population growth and demographics

If the population is growing in the area where you are buying an apartment or house, the demand for housing will increase, thereby increasing prices per square meter. 

An analysis of the demographic indicators of the area under consideration will help to identify the best type of real estate for investment.For example, buying a studio apartment in a suburb dominated by families would be a bad decision.

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5. The share of available space for rent

In a healthy market, the vacancy rate for rental is from 2 to 3%. Here's how it affects your investment:

  • Low vacancy rate (below 2%)indicates high demand and limited supply. The rent is likely to rise, which will provide you with a stable income.
  • The high level of available space (more than 3%) indicates that there are many available options for apartments for rent. The rent may remain at the same level or even decrease, which will affect your income.

6. The period of exposure on the market

The number of days on the market (DOM, Days on Market) is the average time during which a property is placed on the portal before it finds a buyer. Here's what this indicator means:

  • A low or declining DOM indicates high demand.Competition for real estate is high, which leads to higher prices and is favorable for the investor.
  • A high or growing DOM indicates low customer interest. The sale of real estate takes longer.This may mean a slower increase in the value of your property.

7. Market supply volume (SOM)

Stock on Market (SOM) is the proportion of properties in a certain area that are currently for sale.In fact, the indicator reflects the current dynamics of supply and demand:

  • A low SOM indicates a small number of properties on the market compared to the total number of housing units in the area.This implies high demand and potentially limited opportunities for buyers.In this scenario, real estate prices are most often rising due to competition.
  • A high or growing SOM means an abundance of real estate on the market. Supply exceeds demand.This can lead to lower prices or stagnation, as sellers have to adjust the asking prices in order to attract buyers.

8. The size of discounts on the market: negotiating lever

The discount shows the difference between the original asking price and the final sale price of the property.This metric gives an idea of the position of the buyer and seller in a particular market:

  • A small discount indicates a strong seller's market. The property is being sold at a price close to the asking price or even higher.Demand is high, and there are fewer opportunities to negotiate a price.
  • A high discount means a buyer's market. Sellers have to give in to attract customers.Such a scenario is interesting with a variety of options for investors looking for a good deal.

9. The ratio of homeowners to tenants

This coefficient shows the ratio of the number of owners to the number of tenants in a given region. Ideally, you need areas with a high coefficient (above 70%). Why?

  • Less competition:There are fewer investors competing for a limited number of tenants.
  • Improvement of living conditions:Homeowners tend to invest in maintaining their properties in good condition, contributing to the creation of a more attractive area for renters.

10. Potential for value creation

Some objects can be raised to another level through reconstruction, division, expansion or redevelopment. Such opportunities sometimes open up, for example, in the elite segment. However, assessing what the potential for value creation is requires expertise. Factors such as renovation costs, zoning restrictions, and potential overcapitalization require careful consideration.

Recommendation:Consult with a qualified real estate specialist who will be able to assess the prospects and potential profit from the project.

11. Uniqueness

A rare object in terms of characteristics usually means a more valuable one.At the same time, uniqueness as added value in real estate is a complex concept based on quality. Basically, the same type of apartments and houses on the same project are on the market in the same area, so buyers have a lot of identical options among the ads from which they can choose. Your goal is to set yourself apart from the competition by offering something special.

However, at the same time, a property with an individual design and decoration may be of interest only to a limited number of buyers or tenants.

A balance must be maintained here. For example, choose a house with a large land area or additional useful bedrooms/living rooms that make this property more attractive than neighboring properties that do not have these advantages.

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12. Employment opportunities

A strong local economy is a key factor in the growth of real estate prices, especially in cities that are not capitals or regional centers. 

The influx of new residents looking for work leads to higher demand for apartments, which ultimately benefits landlords.

13. Proximity to infrastructure

The lifestyle that a particular area offers plays an important role in attracting the population and increasing the value of real estate.Imagine: you leave the house and there is a lively center with cafes and restaurants within walking distance. Of course, this is a big plus.

Evaluate whether it is convenient to get from the selected area to the city center, to the beaches or to the suburbs.Parks, swimming pools, sportsThe facilities also make the place more in demand.

14. Zoning and type of title

Before diving into the choice of real estate, it is important to understand the rules of zoning and potential restrictions.Here's what to consider:

  • Zoning and location prospects.Study the zoning of the site on which your future property stands and the adjacent territories.Can your investments benefit from the upcoming renovation as part of the zoning plan?Conversely, could changes lead to undesirable land use, for example, a high-rise building blocking the view or a noisy commercial building next door?
  • Restrictions related to urban planning.Be aware of the urban planning prospects that may affect the value of your property.What nuances can there be? Assigning the status of a cultural heritage site to a house will limit the possibilities of its renovation, an order on the protection of vegetation will limit landscape design options, building height limits will affect the development of the environment.
  • The type of title and everything related to ownership. Some types of title imply a restriction on the use of the object.

15. The age of the building and the condition of the property

The condition in which you purchase an apartment or house can significantly affect your finances.What needs to be evaluated?

  • Maintenance costs versus the purchase price.Old properties usually require investments in repairs and maintenance.This can absorb your rental income.However, they are often sold at a lower price.Conversely, new real estate, as a rule, requires less maintenance costs, but also costs more.
  • Depreciation benefits.One of the potential advantages of new properties is the ability to deduct part of the property value from your taxable income.

The ideal scenario depends on your investment goals and risk tolerance.Do you prioritize higher initial income with potentially higher renovation costs, or are you willing to pay more for a property that requires less immediate investment?

In any case, a thorough inspection of the property by a qualified specialist will not be superfluous.Such an inspection will allow you to detect hidden problems that may lead to unforeseen repair costs in the future.

16. Layout and functionality of the room

Will the family be able to comfortably stay in the house? To answer this question, you need to look not only at the number of bedrooms, but also at the overall layout. Imagine a four-bedroom house with a bad layout. It will be cramped and non-functional. 

What aspects should be taken into account?

  • Layout and design.A properly designed property should contribute to a comfortable stay.Spacious common areas, good communication between rooms, separation of reception rooms from bedrooms are important factors.
  • Natural lighting and ventilation.Real estate flooded with natural light seems more attractive and inspiring. Pay attention to which side the windows face. The sunny side can partially solve the issue of heating the room in the cooler months.  Cross ventilation is also desirable, providing air circulation.

17. Type of construction

The materials used for the construction of real estate can significantly affect your maintenance costs.That's why it's important to consider practicality, not just aesthetics:

  • Strength and durability. Give preference to materials known for their durability and stability.
  • Maintenance issues. Study the typical requirements for the care of certain building materials.For example, wood requires periodic repainting, while concrete may require periodic sealing.Understanding the possible costs will help you factor them into your investment budget.
  • Climate and environmental factors. Consider the local climate and environmental features that may affect the property.In areas prone to severe weather events, the choice of environmentally resistant materials such as brick or plastered concrete may be reasonable.

18 Finishing and engineering

Expensive finishes are not always such a significant factor for the successful rental of housing. Nevertheless, high-quality materials and good household appliances will work to achieve your goals.

  • The comfort of the tenants. Reliable equipment, high-quality fittings, easy-to-clean surfaces minimize problems with the maintenance of real estate. Satisfied tenants will seek to extend the contract.  
  • Reduction of repair costs. Durable materials will last longer, which will save you money in the long run.

When accepting properties purchased during the construction phase, be especially meticulous.Make sure that everything stated under the contract is actually fulfilled and installed.

A source: Property Buyer

 

Read also:

ROI, or return on investment, in real estate

 

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