3 things to consider before investing in real estate

Investing in real estate can be daunting. Consider these 3 tips before you get started. They’ll help you evaluate the timing, location, value, and the headache.

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Real estate is a great place to invest your hard-earned cash into, but there are some things you should consider before going ahead with that decision.

In this article, we’ll give you 3 tips to help you make a smart and informed choice before investing in real estate. By following these, you can avoid common pitfalls that some new investors find themselves falling into. Let’s get started!

1) Budget

Your budget is an important factor. If you can’t afford the property you’re considering, then you’re only wasting your time and effort. Knowing your budget will help you identify the types of properties you can invest in and the locations that are available to you. While properties in illustrious areas will be more expensive, the ones in your city’s outskirts will likely be less expensive. In investments, decisions should be made with numbers in mind, not just emotions.

Read our how-to guide for investing in expensive markets

Before you consult a real estate agent or agency, make sure you keep their costs in mind as well. You should have a good cushion of cash besides the upfront property cost to account for any unexpected fees or arrangements that will undoubtedly come up during this process. In the US, the agency fees are included in the purchase price. However, there are closing costs involved. Depending on the county, the seller, buyer or both parties pay the closing costs.

Research mortgage rates to determine a rough outline of how much interest you would be expected to pay on your property. Get pre-approval so that you can do the math properly. This also helps to narrow your focus.

Another factor to keep in mind is your current debt levels. It impacts the amount of loan you can get as banks look at the debt to income ratio. Also, you don’t want to overstretch yourself. It’s best to start your investment journey on the right foot – carrying the burden of existing debt can cripple you before you’ve even started walking.

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2) Location and property class

Location largely dictates the price of your prospective property. Property prices are higher in cities. Whereas in many suburbs, the cost of the property is usually the cost of construction. The value of the land is determined by its location. As an investor, you want to keep the following in mind when scoping your options:

  • Nearby amenities
  • Proximity to schools
  • School ratings
  • Green spaces available
  • Scenic views
  • Overall neighborhood atmosphere
  • Crime rate
  • Nearby supermarkets
  • Proximity to office centers
  • Proximity to train or bus stations
  • Proximity to the city center

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Properties that have these factors going for them command higher prices but can also command a higher rent. This means more expected rental income for you. These amenities increase the desirability of even commercial properties. Such properties usually are less volatile and appreciate well in the long run. As the popular saying goes in real estate, the top 3 things are location, location, location.

Cash flow or appreciation in investment properties?

The condition of the property you buy will determine how much headache you’ll take on. Properties that are rundown and old will put a higher burden on you as you will have to fix them before renting them out. This can be an advantage or a disadvantage depending on who you ask and the price you get for said property.

Read about the pros and cons of Class A, B, and C properties

When buying, make sure you understand the condition of the property and the associated repair costs. Factor these costs in your offer price.

Tips for building a portfolio with Class C properties

3) The Economy

An ideal way to investing in anything would be to buy low and sell high. But this is not always possible. As an investor, you need to be aware of the economic trends and real estate market fluctuations. This knowledge can help you navigate difficult times of economic recession or benefit from times of economic expansion. For example, the chart below shows how real estate prices are impacted during recession and expansion over the last 30 years. Can you spot the patterns?

https://www.homekasa.io/image/blog/ShillerBayArea30Years.png

We share our tips on 8 key skills required to succeed in real estate and how the economy impacts price trends. This can help you to understand where you are in the timeline. This is especially important in this day and age where uncertain economic conditions are causing the market to change and adapt. Familiarize yourself with the statistics and trends based on:

  • Overall real estate value
  • Construction costs in the country
  • Inventory
  • Current mortgage rates
  • Foreclosure percentages
  • Increase or decrease in mortgage forbearance
  • Trends in unemployment rate

This knowledge can help you to understand the timing of your investments. Prices in some neighborhoods are more volatile than others. For example, a manufacturing location behaves differently from a college town.

Are investments in college towns right for you?

Conclusion

We hope this article helped shed some light on some things you should consider before investing in real estate. Be sure to check out the rest of our blog where we discuss real estate investments and give helpful advice and tips on a myriad of related topics.

Our software HomeKasa makes it easy to manage multiple properties, screen tenants, manage property documents, handle move-in and move-out inspections, collect rents, and more – all from one place.

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