Not every real estate investment is a good investment. Multiple factors need to be taken into consideration. Asset appreciation? Rental Income? Short term? Long term? I can talk for hours on this topic, but here are 5 smart principles you should consider.
1. Rental vs Asset Appreciation: Obviously, you’d like your investment to be good for rentals and will appreciate in value in the future. However, if you’re looking specifically for a property where you won’t have much trouble looking for a tenant, consider properties near large hospitals where they are easily rentable to nurses, doctors and other medical personnel. The turnover likely won’t be high as most medical practitioners don’t switch to different hospitals often. Ideally, you’ll want to consider who your target market is in terms of who you’d like your tenants to be. If you’re looking for long term families, then properties near elementary or high schools are obvious. If you’re looking to rent out primarily to students, then properties near universities or colleges would be considered. If you’re renting to business executives, then perhaps properties in the downtown district that are perhaps furnished may be a feasible option. If you’re buying an investment property primarily for the asset appreciation side, you have to also consider the time period, short term or long term which I will discuss below. Generally, pick a property where there’s going to be lots of future expansion in the community. Take a look at the community plan on the city’s website and find out what the city’s plans are for the near future in that particular community. Changes to zoning, transit or possible large redevelopments will affect a neighborhood’s property values in the long run.
2. Exclusivity or Scarcity: The concept of supply and demand explains this point nicely. If you purchase a property that has some sort of rare features, then there’s a good chance that the property will be a good real estate investment. What is considered rare? In a high rise, a penthouse is rare because there’s typically only 1 in the building. Is the building the tallest building in the city? Is there something else unique about the high rise that differentiates itself from other buildings? Was that house designed by a particularly famous architect or designed by a famous interior designer? Does that high rise, low rise or house have a particular view, especially an unobstructed view? Was that property constructed by a famous builder?
3. Short Term or Long Term: Are you looking at buying the property, then flipping it in 1 – 3 years? If so, then maybe a presale development may be a good buy. But not all presales are great investments. I will discuss more in my point below about location. If you’re looking at an investment property where you are focussed on long term (10 – 20 years) gains, then that will definitely affect what kind of property you buy. Generally, land is a great investment asset in the long term.
4. Location: Location is something that is encompassed in the 3 points above. For rental and asset appreciation, location is key. To be able to rent out your property quickly and with ease, location matters. If you buy property that is in a particularly prestigious location, near a prestigious university or school, or in a particularly wealthy neighborhood, then there’s a high potential for the properties in that area to increase. Penthouses are the exclusive units at the top of a condo development. However, if you purchase a rare penthouse in a rare, luxury development, then there’s a lot of potential there as well.
5. Return on Investment (ROI): If you’re thinking about investing, you have to know what kind of ROI you’re looking for. If you put your money in a savings account, what is the interest rate? Maybe 2 – 3%? Is 3% your ROI for real estate? Determine the type of ROI you’re looking for and that will help you determine what kind of investment property you should buy. If you foresee a house will go up $50,000 in the next 5 yrs, then what kind of ROI is that?
I’ve only provided a few points of what you need to think about when purchasing a real estate investment property. As always, consult a real estate professional to assist you with the purchase of a real estate investment. If you have any questions, let me know.