By Wasib Imdad
Real estate investments have great potential to generate wealth, yet they can often be uncomfortably unfamiliar territory. This is because relatively very few investors have the chance to get hands-on experience with the asset class, thus despite many advantages real estate remains a complex investment.
Knowledge is attained by asking the right questions, and knowing when to ask the right questions is knowledge in itself. No matter what method is used to direct your investments towards real estate, there are certain aspects to consider beforehand.
Graana.com brings you some of the methods to assess an investment before handing over your hard-earned wealth.
No matter what kind of investment model you’re considering, here are the questions that every real estate investor should think about:
The first and most important consideration for a real estate investor is to see whether he has enough money to invest in real estate or not. Be sure of what your financial picture is and ascertain whether you are financially fit or not. Real estate investment comprises properties for sale for profit or buying them to rent out. This is an expensive prospect, but many first-time investors are overambitious and thereby run greater risks.
In addition, an important thing to consider is that investments in real estate are not a static enterprise in which a property is bought and you wait for it to start reaping profits. To add value to investments, investors often need to get some work done that can be in the form of renovations or repairs. First-timers need to know that this will cost beyond the initial investment. There are ongoing costs to focus on as well – like home insurance, monthly mortgage payments, property taxes, etc.
Active investments in real estate mean you’re either a house flipper or a landlord. Usually, such people buy properties, invest in renovating them, and then sell them off for profits or buy property to rent it out. In both scenarios, the investor owns the property and is the one looking to garner profit out of it.
On the flip side of it, passive investors are those who make money from real estate but don’t have to put in any work. An example of passive real estate investing is buying rental property and recruiting a professional to look after and manage it. In addition, investing money in a crowdfunding site or a REIT is also a passive strategy as you get the share of profits but a third party owns the investment and is managing it.
When determining whether you’re going for an active or passive investment strategy, it’s vital to know that active real estate investments carry more risk. Active investments have more personal capital held up in projects and carry taxes and mortgage payments.
They also have to bear the costs of project overruns, and brokers have to be paid commission on the sale of properties. People with somewhat less experience can reduce their stake by making an investment with an experienced and highly qualified project sponsor who knows how to alleviate such risks.
Consider your grounds for investing in real estate. As an investor are you searching for a property that will appreciate, or is your investment for cash flow? Are you lured by the tax advantages of a commercial real estate market, such as mortgage interest deduction or depreciation?
Or are you looking for a commercial real estate investment that diversifies your retirement portfolio, which will otherwise be allocated towards bonds and stocks?
An investment horizon, or defining an investment horizon is pivotal for any investment, though some types are illiquid. When it comes to real estate investing, that makes identifying a timeline even more important. Be sure of whether you need liquidity and if yes, when will you be needing it. This will help you ascertain what sort of investments can support your needs.
One of the real estate’s most acknowledged benefits is its potential to diversify an investment portfolio. However, not all diversification is equal. Make sure you understand how the addition of any new investment will influence the overall earning and risk potential of your investment scenario.
For example, an investment in a public or private market can hugely alter its power to diversify, so be aware of what fulfills your requirements.
Wasib is a content specialist at Graana.com
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