Buying real estate can be daunting for many first-time property investors, after all, when you invest in real estate, there are many variables involved if you want to pick a winning property. Some people believe that the risk involved with buying a house outweighs the benefits.
In this article, we'll outline what you need to consider when buying real estate, the benefits of owning real estate, what questions to ask yourself before buying a house, and finally the many ways to invest in real estate and diversify your portfolio.
5 Things To Consider When Buying Real Estate
Whether you're looking into buying a house to live in or investing in real estate to rent out, there are going to be a few things you must take into consideration before parting with your cash. These variables will drastically affect your profit margins, and time spent on the property collecting rent, making repairs and inspecting your properties.
Location is considered one of the most important factors when buying a house, it's important that you as an investor find the best location possible, this will give you a greater chance of finding a tenant.
You should take into account the proximity to the downtown area when investing, according to Zillow: "In 18 of the 35 large metro areas included in the analysis, buyers should expect to pay more for a home within a 10-minute rush-hour drive to the downtown core."
But, commuting distance isn't a dealbreaker for everyone, as remote work continues to be on the priority list for many Americans, they're beginning to place shorting commute times as less of a requirement.
Another few things to consider are how close you are to shops, restaurants, schools, parks and other attractions. If you're looking at buying a home fit for a family for example, it'd be smart to make sure the property is situated close to the mentioned amenities and attractions.
2) Crime Forecasts
A study into how crime affects property prices stated: "Our results suggest that of the two major categories of crime (property and violent), only violent crimes exert a meaningful influence upon neighborhood housing values. A 10 per cent increase in violent crimes within a neighborhood is found to reduce housing values by as much as 6 per cent".
Therefore, it's important to understand the crime rates in the local neighborhood, and which crimes are regularly being committed. There are a few tools online that can help you forecast the crime rates of a neighborhood over a 5-10 year period.
3) Property and Local Infrastructure
Infrastructure such as quality roads, schools, hospitals, and even internet speeds are all important things to research when buying a property.
Carnegie Mellon University and the University of Michigan recently found that adding a high-speed fiber-optic connection to a single-family home could increase its value by around $5,500.
If you’re looking to increase the value of your property, find houses that don’t currently have finer-optic and install/upgrade to increase the value quickly. Most times, you increase the value of the property by upgrading small things such as this.
Considering that remote working has reduced many peoples requirements of living close to key infrastructure, this might not be as big of a deal as before Covid.
Did you know that on average, when an Amazon fulfilment centre is built, property values of the surrounding neighborhoods increases by 10%.
If you're really prepared to research, you could deep dive into any plans for government or private investment within that area, typically infrastructure and private companies investing in neighborhoods will drive local market prices up.
You could make a “freedom of information” request with the local government for all the companies looking to develop in the local area, or that have applied for business licences. You could do the same for public plans for infrastructure developments. There should be a section on your local governments website for this application/request.
4) Requirement For Repairs
Make sure you check the property out rigorously during the due diligence period and if you find any significant issues you can ask for money off.
The person carrying out the inspection will provide their report to the sellers to fix or knock off some money, therefore allowing you to fix the issues.
The last thing you want is to have to spend more money on repairs and therefore eating away at your profit margins.
Make sure to check for damages on things like:
- Chimney (If it has one)
5) Foundation And Structural Security
Similar to the previous point, you'll want to ensure that the foundation and overall structure of the property is up to modern standards, especially if it's an older building.
Most buildings will have small, hairline cracks which aren't an issue as this is the building settling. But, larger gaps are a serious issue for the foundation and pose a risk to the integrity of the structure.
Look incredibly hard for these during the due diligence phase to save yourself and profit margins. It’d be a good idea to hire someone to assess the property, you can easily find these people online with a quick google search.
The Benefits Of Owning Real Estate
Real estate investing is a great option for most people to consider, the issue is that many are reluctant due to not knowing the various benefits of owning real estate. If you're on the fence about investing in real estate, we'll show you three of the main benefits to owning real estate.
1. Passive Income
Owning real estate can generate considerable cash flow and income which can help pay for living expenses or be invested further.
Renting out your property, can provide you with a different kind of wealth, it offers more freedom compared to other types of investments.
Even if you don't want to deal with the day to day operation of your property, you can hire a property manager to collect rent, carry out admin and organize repairs.
If you own enough real estate, you could completely replace your job salary with your real estate income.
2. A Diversified Portfolio
Having real estate in your investment portfolio is a great way to diversify your portfolio. If you own just cryptocurrency and the whole market crashes by 90%, your net worth has been wiped out almost entirely and an incredibly dangerous situation to be in.
The same goes with stocks, and it's always important to "never have all your eggs in one basket". Investing in a number of different assets will ensure you're not overexposed to any one market.
3. Tax Advantages
Real estate investing also comes with it's own tax advantages, making it more attractive for investors.
There are many tax benefits, real estate write-offs can come in the form of property taxes, mortgage interest, and property management fees, all of these can be used to lower that tax bill.
By holding your investment property for longer than a year, you only need to pay between 15-20% capital gains tax compared to 30% or higher for investments less than one year.
*Dependent on local tax laws and regulations.
3 Questions To Ask Yourself Before Buying A Property
There are a lot of things to consider before buying property, here are 3 crucial questions you should ask yourself.
What Is The State Of Your Finances?
You should never buy a property if you can't afford to buy it outright or have a suitable plan to finance the purchase of the property.
Many people might be wondering how they know if its out of their price range, it really comes down to the amount you’re comfortable parting with for the property. Or, you could use this neat home affordability calculator.
If it's way out of your price range, start looking at other properties further out of that area, the further you go from the city, the cheaper it should get.
Try looking on the outskirts, it'll increase the commute time but with reliable infrastructure it shouldn't be too much of an issue.
Do You Have The Time To Rent Out A Property?
A lot of the time people forget that a huge part of owning a rental property is the management of it. You have to collect rent, enforce rules, manage and find tenents, ensure repairs are made when requested.
It's not as passive as many people assume and if you have a full time job and a family, the work required will add up as your portfolio increases. It might be worthwhile to hire a property manager to manage your properties.
Would You Like To Rent; Or Invest In Real Estate Alternatively?
Luckily we're not stuck with just traditional forms of investment anymore, the world has changed and there are now more modern ways to gain exposure to the real estate market.
If you'd like to learn about how you can make money in real estate without owning a property, check out our article!
Essentially, you have a few options and they tend to be cheaper and don't require you to own a property such as trading with Parcl and buying shares in a house, otherwise known as tokenized fractional ownership.