If you want to invest your hard-earned money and safeguard your future income source- what would be your numero uno choice? Confused between the latest fad of cryptocurrency or the old-gold stock market?
We will tell you a secret real estate investing is becoming the go-to investment plan for high-net-worth individuals, and the global market trend also shows it to be a promising sector.
In 2020, the value of all real estate in the world hit $326.5 trillion, a 5% increase from 2019 and a record high. During 2020’s global lockdowns, investors may have anticipated a decrease in real estate prices and a rise in distressed prospects. However, the impact on pricing was minor, and a flood of distressed assets never materialised. According to MSCI Real Capital Analytics Worldwide Capital Trends, the market grew in 2021, and global investors executed transactions of USD 2.1 trillion.
Real estate is more valuable than all worldwide equities and debt securities combined and about four times that of the global GDP.
The Top 9 Real Estate Investing Tips
Real estate investment is one of the surest ways to plan for retirement. If you are just starting real estate investing, you must follow the rules to succeed. So, what exactly is especially important when considering your investment in real estate? Location is an important consideration, and many other factors can help determine if the investment is right. Here we look at some key investment property rules to follow when investing in the real estate market.
1. Research your location:
The redundant adage location, location, and location still apply and remains the most critical factor in the profitability of real estate investments. Comfort, green space, scenic views, proximity to commercial markets, neighbourhood conditions, and transportation facilities all play important roles in evaluating residential properties and their worth.
2. Analyse expected cash flow and profits:
Cash flow is the amount of money an investment generates after deducting overall expenses. Positive cash flow is the key to good returns on investment properties. Before any real estate investing, one must create a list of overhead and cost forecasts. As inflation favours landlords on rental income, expected cash flow from rental sources is expected to increase. The golden investing rules in properties include calculating a cost-benefit analysis of pre-sale refurbishment to achieve a better price.
3. Focus on demographics:
Understanding demographics should be the final piece of the decision-making process. Over the medium to long term, it is known that demographic shifts will outweigh the short-term effects of changes in interest rates and government stimulus. Ultimately, one must always look for places that can weather the recession and generate above-average returns in favourable times. Investment property rules have a lot to do with the demographics and wealth of the locals – both owners and renters.
Many believe that the distribution of wealth is a bell-shaped curve, with most of the population lying in the middle, with the rich and the poor outliers. Suppose one looks for neighbourhoods where wealthier, highly skilled knowledge workers live or rent. In that case, one will find that these neighbourhoods are often gentrified locations, meaning the suburbs where wealthy people are upgrading and moving out. This demographic segment can afford and is willing to pay a premium to live in new lifestyle locations.
4. Use leverage wisely:
Loans are convenient, but they are also expensive. Know clearly how to deal with loans and try to avoid what is called too much debt or over-indebtedness. Even real estate professionals suffer from excessive leverage during unfavourable market conditions, and liquidity constraints from large amounts of debt can derail real estate projects.
Determine the type of mortgage that best fits the situation – fixed rate mortgage, variable rate mortgage, zero down payment, etc. Remember that each type of mortgage has its risk profile, and each should be carefully considered.
For example, the variable rate mortgage includes the mortgage interest rate of the current market, which can change at any time due to capital market forces, requiring the borrower to accept interest rate changes during the life of the loan.
5. Never underestimate overhead costs:
Usually, when buying a property for the first time, we focus only on the purchase price and ignore other costs like insurance, stamp duty, instalments, and general repairs. Turning a blind eye to these inevitable costs can have serious repercussions after buying the property. One should plan for such costs in advance and avoid costly maintenance issues.
6. Never consume your capital completely:
This is one of the obvious yet compelling investing rules in properties. Amateur investors do not understand this rule and rarely succeed in real estate investment. If you want to be successful in real estate investing, you need to understand the difference between good and bad investments. A good investment yields a return in less time and ensures that the invested capital is recovered as soon as possible. Once you have successfully recovered the capital, never use it up and keep it moving. Try to generate more money by reinvesting it.
7. Always focus on continued strong demand:
Investors should always be looking for properties in high demand by owners. The pandemic has changed how we live, work, and expect from real estate. Urbanisation has taken a step back as Australians move to increasingly smaller suburbs and villages. As working from home has become the norm, buyers are demanding properties with more space and capacity. As a result, high-density, high-rise apartments are losing popularity.
8. Rent affordability will always be linked to wages:
One must always consider the local rents when researching real estate for investment. The lower the rent, the more time it will take to break even on your investments. These are places where tenants are always a week or two away from bankruptcy. On the other hand, some people may prefer to buy their own homes rather than pay rent.
9. Always have a financial buffer in place:
One must always have some financial headroom to get you through the ‘rainy days. The COVID-19 pandemic and widespread lockdowns taught us the importance of cash buffers. How much you need as a buffer depends on your money management skills and cash flow situation, but keeping 6 to 12 months of living expenses in a balanced account is often a good idea. You’ll unlikely be without income (and out-of-income protection insurance) for 6 to 12 months.
A cash buffer ensures sufficient time to make any necessary adjustments, including the sale of real estate assets. This reduces unnecessary stress and anxiety, as well as the pressure to sell your assets quickly. Having a financial buffer allows wealthy real estate investors to have time for themselves and not just for real estate.
We are undoubtedly living in a transition period after the pandemic, but this is also a temporary phase. These top nine real estate rules will always be important. Long-term benefits always overwrite short-term gains.
Over the past year or two, the housing market has proven its resilience. People will always need a place to live, and housing is a true ‘haven’ in today’s environment. Investing is always a challenge when everyone walks around worrying about the end of the world. It is unwise to base 30-year investment decisions on the news of the last 30 minutes or even the last 30 days. These short-term recessions are precisely the conditions that offer the best opportunities for long-term investors. Now is the perfect time to line up all the capital and take advantage of the real estate opportunities the market has to offer.
For more information on real estate investing, please get in touch with the experts at Freedom Property Investors.