Real estate lures investors because of the possible windfall or at least an assured appreciation of their investments. But there can be adverse situations which might make the speculation go wrong, and it might cause serious financial losses. The investment in property must be viewed very carefully from all angles to avoid such pitfalls; these usually occur due to circumstances beyond the control of the individual real estate investors.
DUE DILIGENCE: When investing in rental property, purchasing real estate that will net some income after expenses is wise to reduce some of the risks to the funds that you’ve invested in the property. Investment in rental property should only be done after studying the issues involved, beginning with the expected returns from the property and the costs of attaining it. Though you will want it to be constantly occupied and earning money, that most likely will not be the case. At some point, a tenant will move out and leave it needing cleaned up, or fail to pay and you may go a few months going through the eviction process. These things are also important considerations, and you should plan for the inevitable by reserving some of the proceeds.
ROI: An additional consideration is what your ROI will be for the property. For instance, a property that gives an assured rent based on your research about the property and location is a good thing. But, is it the best way to invest your money? Figure out what the return on investment is in a percentage basis and compare this with other potential investment avenues. For instance, you buy a property for $200,000 and you net about $5,000 per year from it. The ROI for this property is 2.5% (not taking into account how you set the financing for the property, or any appreciation on the property value.) Is this an adequate return for your money—or could you do better buying mutual funds? If you will buy and hold the property for a significant period of time, appreciation of the value can also add significantly to your returns.
LOCATION AND MORE: Many factors about a property figure in to the long term value appreciation equation. It can be judged from many angles and realistically assessed by taking a look at the important features. Of course, everyone knows that the most important thing is location, location, location when it comes to property. There is no getting around the fact that the demand for property in Manhattan will always be exponentially higher than demand in rural Kentucky. Location within a local area is also tantamount to the value; there are desirable areas and budget areas in almost every large city the world over—and that has a definite effect on the type of tenants you will get as well as appreciation due to neighborhood amenities and transportation hubs.
The availability of schools is also a factor that influences the tenant preferences. You must check the quality of the schools around the locality as that will be a great influence on the long term growth of residential property values.
It also pays to check with the local municipal authorities about any planned developments in the area, as they can have a profound effect on the value of the property, and you will have an idea where you can find the best amenities in the city in the near future.
Crime rate in the area also influences the future value of the rental property because no one wants to live in an area that is unsafe, or is known for criminal activity.
Good job opportunities in close proximity are also vital. Sure, you can live on a 30 acre mini farm, but can you make a living there, or will you have a long commute to a job in the city? Nearby job opportunities are a very positive factor for home value inflation.
One final consideration: buy to let insurance is important before you make an offer on the property to ensure that your risks will be minimized in the event your property burns to the ground. As you can see, property investment is not for the weak at heart, but many millionaires have built their bank accounts with rent checks!