While investing in real estate poses a lower risk compared to equity investments, top-ranked real estate brokers advise beginner investors to consider some important factors before taking the first step.
“Typically, two out of three newbie real estate investors fail to create a plan and neglect due diligence before deciding to acquire a property. This classic misstep, of course, set them up for avoidable losses,” says Bob June, a Miami real estate agent.
Wondering what factors to consider before buying a property?
Read along to find out the important factors many successful real estate investors paid attention to before investing:
1. Property Type
Do you already know the real estate property types you want to invest in and why? Each of these property types has its pros and cons. There are commercial, residential, retail, and industrial real estate properties investors can buy.
“Whether rental apartments or single-family homes, residential type of real estate property has the lowest risk, hence, its profit margin is also relatively lower. It usually offers an annual return off the purchase price between 1% to 4%,” says Mark Hue, author of Building a Real Estate Empire in Miami.
Besides, the influx of new immigrants into Miami and its potential population growth – thanks to its quality of life – investing in Miami residential property will always be a safe bet.
Nonetheless, if you have a great risk appetite, you can invest in industrial, retail, and commercial property. The latter particularly holds a yearly return off the purchase price ranging from 6% – 12% depending on various factors.
Some of the drawbacks you might encounter for investing in commercial properties such as warehouses and retail buildings include vacancy and larger capital investment.
So it’s important to consider these real estate investment types diligently before making a decision.
Cole White, a financial advisor, recommends that beginner real estate investors estimate their financial commitments for the subsequent seven months of their lives to determine if they’re economically robust enough to dive into real estate at any point in time.
“Real estate investment first consumes more than it pays dividends, hence it’s crucial to have surplus emergency funds at hand or savings. If you don’t have a reliable source of income, it’s best to wait,” says Cole.
Engage in monthly savings to generate sufficient funds to invest in your preferred type of real estate, or even go for loans such as the FHA 203(k) loan.
Besides, even before choosing a property to acquire, you must create a budget. This should include bank charges and other expenses for hiring a real estate agent. This tip will also help you deduce if you have the financial capacity to invest in a property that requires renovation or furnishing.
3. Property Location
Since time memorial, the profitability of real estate investing greatly depends on location.
“A property that shares a boundary with a great landmark in a city or is located in a reputable region will appreciate given its desirability,” says Paula Lake, a Florida real estate agent.
Moreover, location shouldn’t only be linked to a thriving neighborhood. Instead, think about its potential to either appreciate or depreciate in the long run. An effective means to determine this is to undergo research to see if people especially millennials or the Z generation would likely exit or relocate to such a location in the next five years if given an opportunity.
“When searching for a location ensure that it’s commutable, lively, economical, shares proximity to educational institutions, has potential for development, and social amenities,” adds Paula.
Some of the desirable neighborhoods with great real estate investing in Miami include Lake Clarke Shores, Little Haiti, Midtown Miami, and Vedado.
4. Real Estate Appraisal
Smart investors must generate an appraisal report or determine the economic value of a property before putting pen to paper. Employing the service of a property appraiser will help you achieve this aim.
Below are various valuation methods that’ll help you deduce the value of a property you intend to purchase:
Income Approach: When trying to purchase a property for commercial or rental purposes, the income method is the most valid approach to determine the property value. This strategy will help generate the income that your property is expected to yield.
Here the Net Operating Income (NOI) is halved by the capitalization rate.
Cost Approach: This valuation method determines if the cost of acquiring a property is equitable to building it from scratch. In the cost approach, the expense of building a property from start must be higher than the site improvement so that the investor can gain.
Sales Comparison Approach: This method entails comparing a property with other similar properties newly traded within the same location. This will help you estimate its value to make an informed decision about the real estate you are about to acquire.
5. Evaluate Your Mortgage
Whether you’re investing in one of the top penthouses in Miami or buying a single-family home, you may have to take a mortgage for your residential property investment. Hence, it’s important to determine which mortgage is best suited for your residential property, says Elon York, a Real estate developer in Florida.
“Besides, a fixed-rate or adjustable-rate mortgage has various loan features that each investor must consider for their own needs,” adds Elon.
Utilize an adjustable-rate mortgage if you intend to dwell in your purchased estate for a short term before leasing. This is because its initial interest rate is relatively lower than a fixed-rate mortgage.
6. Consider the Category of Real Estate Investment
Depending on your knowledge and financial power, you can choose between actively investing in real estate or passively doing so.
“Do you know enough about the various investment strategies, such as house flipping, Airbnb rentals, and rental properties?” asks Taylor Joshua, owner of Taylor realtor.
An active investor would need to arm themselves with in-depth knowledge about real estate investing since the profitability of their investment rests on them. Moreover, they need huge finances to invest profitably.
Passive investment is most suitable for beginner investors who don’t have the huge initial capital nor expertise to ensure the success of their investment.
Moreover, a real estate investment trust is a feasible means of investing in real estate at an affordable rate. This category affords investors a portfolio of real estate. That way, you can acquire shares of this company to receive dividends.
Private equity funds are another type of real estate passive investment. It enables investors to pool their funds together with a community of other investors into an individual fund.
While you don’t have to have hands-on experience in the management of your fund, it’s vital to understand the volatility and potential of your property investments via the fund. Keep in mind that investors have to pay about 2% annually for the management of their funds and also a 20% on each profit made in a private equity fund.
You can also consider real estate mutual funds or exchange-traded funds for your passive form of property investments.
No condition is permanent in the world of investment including real estate. So research the current market condition of the Miami real estate before making any move. If the prices are down, simply buy and hold.
With the above factors to consider before investing in Miami real estate, you can effectively make a profitable investment decision and become one of tomorrow’s Miami real estate empire owners like Jorge Perez.