What are the essential factors that one must consider before investing in real estate? Although numerous factors can influence decision-making, here are some of the critical points that are significant enough to get a place in your checklist.
Factors that each real estate investor consider prior to investing in real estate
Liquidity Analysis
Always analyze your present and future liquidity and expected cash flow statements. Real estate investments are not liquid by nature. Moreover, locking your all investments in real estate assets can create a liquidity crunch. Hence, withdrawal from properties is not easy; distress calls may affect investors’ appreciation and returns. Thus, before investing, a thorough liquidity analysis is a must.
Answer the below questions to yourself.
- Do I have sufficient funds to meet my immediate and medium-term financial responsibilities?
- Will my real estate investment leave me in a cash crunch?
- Is my financial portfolio balanced enough to provide me hedge during a market recession?
- After taking 80% bank loan, will I meet down payment and registry payment needs?
Investment Objective
Real estate investment objectives differ from person to person. Here is a small list of real estate investment objectives to help you with your real estate investing.
Appreciation and growth
Appreciation of the property sale can be one of the primary objectives for real estate investors. But this appreciation can come with a short-term or long term horizon.
Generally, investors who invest for short-term appreciation goals invest in an under-construction property. This can be short term funds parking with a motive of quick appreciation. At the same time, long term real estate investment yields higher and better appreciations and provides indexation benefits in long-term capital gain.
Regular income
Many investors make real estate investments with regular income motives. Most people seeking regular income after retirement make such investments. Many investors put their properties on rent and lease out to corporates and other institutions intending to generate steady rental incomes.
Tax and deductions
This aspect was discussed earlier, but now we will make this clear at length. Long term capital gains are exempted from any kind of capital gain tax till investors reinvest these gains for buying or construction of another house. To avail the benefit of this clause, investors have to reinvest their gains in the property only and within specified durations. But this law has certain conditions as well, which can affect the real estate investing decision at a great length.
Investing in real estate and Location Factor
Location plays a significant role while making real estate investment decisions. Attractive location properties fetch a premium and higher valuation rates. Area, scenic view, amenities, and distance from key places play a significant role in investing in real estate. Some of the important factors that investors should keep in mind while deciding are as below.
Location and Buyer’s persona
Generally, residential properties with good amenities, closer to schools, hospitals and central places, attract better appreciations and rental incomes
Most retirees prefer locations that are in closer proximity to hospital facilities; young professionals like properties that are closer to their office places and around recreational zones. It defines buyers persona and its effects on their real estate investment decision making choices.
Location and life cycle of real estate market (analysis)
Real estate markets also go through life cycle stages. Recovery, expansion, hyper supply and recession are four stages of the real estate life cycle. As an investor, you need to research your targeted area’s sale and resale data. This research drive will give better insight into the life cycle stage of the targeted real estate market. These real estate life cycle stages mainly occur at the developed stage.
Any location that offers the best amenities and several location benefits can attract stagnant valuations at the recession stage. Thus, if you are an investor who aims for appreciation and growth and investing at the hyper supply stage can end up with fewer valuation hikes compared to other markets which are going through from the expansion stage.
Background and financial stability of Builder
This factor is essential after considering all the parameters mentioned above. Past records of Builder, timely possession and financial stability of Builder is necessary to verify. The more time-delay in possession of the property will lead to loss of rental income for investors and bring instability to the financial condition of Builder. Thus, it is advisable to verify previous records of Builder first.
Leverage and Mortgages
Leverage can be an important aspect of real estate investing. Housing loans provide various tax benefits, which can influence decision making. Financial leverage through borrowed capital can unlock potential returns from property assets. The investor needs to understand the loan repayment implication of this added leverage. Loan repayment directly affects the in-hand income of the investor.
Another aspect is the mortgage. Real estate properties are tangible assets that can be mortgaged with financial institutions and infuse fresh funds. But the mortgage needs to be paid back. Thus, this aspect should also be examined at length.
Portfolio Diversification
Real estate investing is a good technique for portfolio diversification. Investors have short and long term financial goals through financial planning they can achieved these. Good financial planning never puts all investment chunks in one place. Instead, they keep investment objectives in consideration and diversify their portfolio.
Under construction or ready to move in
The under construction takes time to generate regular income or appreciation but comes with a down payment and instalment benefits. That gives leverage of reducing the immediate financial burden on investors. Further, there is scope for customization and better amenities.
But delay in possession, changes in neighbourhood areas can affect. People often invest in sea-facing flats and later find a new building obstructing the view after some years. So, there is scope for such surprises too.
With ready to move in properties, the possibility of immediate income is high. There is no fear of delayed possession as well. But one has to pay full payment or pay as per terms of the sales deed. It puts an immediate load of loan EMIs on investors but can also save them from future surprises.
Summing Up
Real estate investing comes with many benefits like steady income, noticeable appreciations, portfolio diversifications, hedge against inflation. But to make a better choice, it is always better to consider the parameters mentioned above to reach at a better decision.
Mrs. Vibhu Rozatkar
