Building your investments — Property investing

Whenever you invest in property, there are certain factors you have to consider before deciding if it is a sound investment.

Location, market demand, and cost of maintenance and repairs are amongst other factors to consider when investing in property.

However, when you invest in renting a property, it can be a little more complicated than merely buying to resell later. Because becoming a landlord will require a more substantial commitment, especially on a weekly, if not daily, basis.

But with property prices increasing on an average of 11%, with the growth becoming even faster in light of the pandemic, the lure of returns is too appealing for investors.

Here is a summary of what you’ll want to know and understand before deciding to dive into property investing.

What is property investing?

Property investing, also known as real estate investing (especially in the USA), involves purchasing, owning, managing, renting, selling properties, and real estate for profit.

It’s purchasing property, whether houses, units, blocks of units, commercial property, offices, or even land. And you’re buying it to eventually make a profit.

Researching the property market

When considering property investing, ensure that you know the market.

For instance, you need to know just what the property itself is worth. Find out what other comparable properties are selling for in that area. Call the estate agent companies that handle the selling of specific properties to inquire how long they have been available on the market at their current price offering.

That will give you an indicator of market demand for the property itself, which is helpful to decide whether it is a sound investment, plus knowing how much room you might have to negotiate on price.

After obtaining knowledge about property buying, you will need to research the local rental market. You’ll need to consider similar properties to the one you wish to buy, and ask:

• How much are the local rental prices?
• What are the current tenants paying (if applicable)?
• Is there a demand for such a property you wish to buy to rent?
• What types of tenants are seeking your property type?

If you are considering investing in an apartment complex. In that case, you should contact the current property management company and inquire about the following:

• Whether apartments remain vacant, and for how long?
• How long does it take to fill a vacancy?
• The usual length of tenant occupancy.
• And what the renters are getting (how many bedrooms, bathrooms, amenities, do they pay utilities or does the landlord)?

Investigate other comparable properties in the neighbourhood and check if you can get more information. You’ll then understand what a reasonable rental rate you can expect to charge for guaranteeing you the most optimal tenants (those tenants that pay on time or do not cause much damage to the property).

Failing to do your research could lead to you charging high rental prices, leading to increased vacancies and evictions. Alternatively, you’ll charge too little and not only undercut your profits but likely attract a less desirable quality of tenant.

Understanding all the costs

There is a whole lot of budgeting that goes into property investing. You have to know what you can afford in terms of the mortgage, rates of interest, and the standard costs of buying a property.

But you also have to factor in the costs you will incur with ongoing maintenance (plus the costs of any initial repairs you may need to make).

For example:

• cleaning swimming pool (if applicable),
• landscape gardening,
• pay for utility costs,
• management fees,
• other predictable maintenance costs like ‘wear and tear.’

If this sounds too much, consult with other property investors or a consultant who can calculate the projected costs before buying the property.

3 property investment options

Rental properties

Owning rental properties can be an excellent opportunity for property investors with renovation skills or the patience to manage tenants. However, this investment strategy requires substantial capital reserves to finance up-front maintenance costs and to cover vacant months.

For instance, it can become quite tedious managing tenants and their demands. Should the property need more maintenance from wear and tear or damage, this will impact your profits. Plus, you run the risk of not receiving rental income should the property remain empty whilst you search for tenants.

Once you have regular tenants, you will experience a stable rental income to boost your returns. Property prices generally increase in time, so should a decade later you wish to sell, rewarding investors with a tidy sum.

Property flipping

Property flipping is for investors with significant experience in property valuation and renovation. Property flipping requires upfront capital and the ability to either personally oversee the renovations or manage others as needed.

Property flippers are different from buy-and-rent landlords. Property flippers look to profitably sell the undervalued properties they buy in less than six months.

Typically, they will buy properties that have some potential and then add more value by renovating them (adding heating, installing new kitchen and bathroom appliances, and so on).

A caveat, however.

Property Flippers who cannot swiftly unload a property may find themselves in trouble if they don’t keep enough uncommitted cash on standby to pay the mortgage for the property over the long term.

For example, during a property market crash, mortgage payments and maintenance costs can drain your capital reserves if you’re holding onto properties you cannot sell. They all need maintenance, and property investors must continue paying the mortgages, leading to crippling losses.

Other property flippers do not rent properties. They merely buy them in areas where gentrification or a current well to do neighbourhood and wait for the market to rise. Then, when at a point they deem enough to make a profit, they sell. This strategy requires the most minor maintenance, but property flippers must have enough cash on hand to ensure they keep up the mortgage payments.

Online property investment platforms

Property investing platforms are for investors who wish to join others in investing in major commercial or residential deals. The investment is made via online real estate P2P platforms, also known as crowdfunding. Like any P2P platform, it requires investing capital, although less than what’s needed, to purchase the properties outright.

Online P2P platforms connect willing property investors searching to finance property development projects, with property developers.

Online property investment platforms do charge management fees. Still, unlike buying a property outright, it means you can reduce the risk by pooling together with other investors to buy both residential and commercial properties.

P2P property investment platforms also make it easy to get started investing in the property market, much like P2P investing per se.

Final thoughts

Whether property investors use their properties to generate rental income or sell until the perfect selling opportunity arises, it’s possible to build investment income.

As with any investment, there is potential profit within property investing, whether the overall market is sluggish or booming. Just ensure you calculate the costs associated with buying and flipping properties.

It may lead to you deciding to use a P2P crowdfunding platform instead.

Originally published at https://moneyhub.ee.