All kinds of investments come with some level of risk. So, it’s important to understand the risks versus returns rate before making an investment.
Real estate is the largest asset class and often the primary source of wealth for individuals. It’s also an excellent way to diversify an investor’s portfolio.
1. Location
The location of your investment property is one of the most important factors to consider. This is because it can affect your rental income and property value. It is also difficult to change your property’s location once you’ve purchased it.
Many potential residents will evaluate your investment property’s location based on its proximity to essential amenities. For example, families with young children will likely prefer properties in areas with good schools. Similarly, elderly residents may prefer rental homes that are near walking trails and parks.
You should also look for locations with strong employment rates and household growth. This will help ensure that your property will appreciate in value over time. Moreover, it is also important to research any upcoming developments in the area that might increase demand for your investment property.
2. Cash flow
Cash flow refers to the difference between a property’s income and its expenses. These include mortgage payments, insurance costs, management fees and property taxes. The higher the income, the better the cash flow.
A landlord’s income can also be boosted by depreciation deductions for the price of the property and various home improvements. This can significantly boost the overall return on investment.
However, it’s important to keep in mind that real estate is a volatile industry. This means that market conditions change from time to time and it’s best to remain up-to-date with local housing and property prices and taxes. This way, you can be sure to make a smart investment and enjoy competitive risk-adjusted returns.
3. Taxes
Unlike a stock, your investment property is a tangible asset. Investing in real estate can yield passive income and the opportunity for appreciation. However, it’s important to understand what taxes are involved.
Real estate offers tax breaks and depreciation deductions that can significantly reduce your overall tax liability when selling. Additionally, you may be able to use a 1031 exchange (subject to certain rules) where you can take the proceeds from the sale of one property and reinvest it in another, without incurring capital gains taxes.
Ultimately, investing in real estate can yield attractive returns on your money while providing diversification for your portfolio. But before you start purchasing properties, make sure you understand the pros and cons of this unique investment option. Then you can decide if it’s right for your goals and financial situation.
4. Leverage
The leverage that could be expected from an investment property largely depends on its location and the amenities surrounding it. The proximity of shops, markets/malls, recreation and lifestyle activities greatly influences a property’s worth and demand.
It’s also important to consider the prevailing market conditions. For example, if the market is rising or falling, it can have an impact on both the price you pay and the amount of return you get.
In the case of investing in real estate, leverage essentially involves borrowing funds from a financial institution to invest in properties that you own. However, it should only be used when you have the financial ability to absorb any potential losses. If you don’t, a single mistake can cost you enormously. This is why it’s essential to understand the nuances of financial leverage before investing in real estate.
5. Liquidity
The liquidity of an investment is the ability to convert it into cash quickly. This is a key factor to consider when choosing investment properties, especially if you’re looking for the potential to sell them later on.
The good news is that real estate provides the highest levels of liquidity of all investment assets. This is thanks to the fact that property can be purchased using leverage, meaning that you only need to put down a small percentage of the purchase price in order to buy it.
As Bren explains, CRE owners can create liquidity for various reasons, such as to monetize a gain in value, pull out capital from the asset, or for any other reason. However, creating liquidity can be expensive and can also reduce the value of an asset.
