Real estate can be a very attractive source of income. It can also be a great way to enhance the diversification and return on an investor’s portfolio. To be a savvy real estate investor, it requires good analytical skills and proficiency in raising capital. From a basic investment property to “flipping” or trading property for profit to operating a real estate investment group, there are many approaches. Knowing how to invest and doing the proper research is important. Here we outline some of the basic points you should understand when looking to invest in real estate.
A location with steady growth in jobs can signify a strong rental market and make for a good investment. Also, look for areas with overall economic growth, as when the economy increases it drives businesses to hire more people and require more space. A smart investor should ensure that a full analysis is undertaken on unemployment rates of the area that you’re looking to invest in, along with market rental rates and overall consumer confidence.
A review of the location’s vacancy rates is also important. A rise in vacancy rates will, in turn, lead to a decline in rent per square foot and can also result in an increase in turnover in the building.
Also, take the time to evaluate the location’s absorption rates. The absorption rate tells you the rate of sales for available properties in a given time frame. A high absorption rate indicates strong demand and reflective rental rates.
For investors looking to have an income stream in rental properties, they need to have a clear perspective on comparable buildings in the area and overall market rental rates. You would typically want to see a cash flow demonstrating positive returns over ten years with low volatility.
Finding areas with low land supplies can be a good indicator of potentially increasing land values. Also, gateway markets and emerging markets with limited land supply are attractive investment choices.
When to Buy
There are many factors at play when deciding to purchase. But when you find a property with high returns and low volatility set in a location fostering stable economic fundamentals, low vacancy rates, positive absorption, and strong demand for living and working, you should consider buying.
Research all the different types of mortgages that will be available for you at a favourable interest rate. If you don’t have the equity to buy on your own, you can look at partnerships or capital raise projects with private investors.
Investing in a REIT or Fund
You may also prefer to invest into a Real Estate Investment Trust (REIT) or a Real Estate Mutual Fund offered by a professional investment company. These entities purchase and hold a portfolio of properties, and you can purchase shares in the company. Look for companies that have historical solid returns, strong property management teams, and know-how to make a profit by adding value to undervalued properties. You can also maximize your returns and reduce risk by investing in a variety of real estate mutual funds, to create better diversification in your portfolio.
Real estate can be an excellent investment vehicle if you know how to navigate the system. But it also can be challenging for those who don’t have direct experience in the industry. Working with a financial advisor specializing in investments can help smooth over the process, and ensure you understand all the ins and outs of the complex system of property investment. Speak with your financial advisor from The Beacon Group of Assante Financial Management Ltd. to explore your options.