7 Factors to Consider Before Investing In Real Estate
by Daniela Baker
There are several criteria to consider when investing in real estate, in addition to cash flow and long-term growth.
1. Employment and Job Growth. While monthly cash flow is important, it is also important to look for markets with corporate friendly cultures, strong employment centers and robust employment growth in the foreseeable future. Each factor is a useful indicator that the population will continue to increase creating an increased demand for real estate with steadily rising prices.
2. Consider the price to rent ratio. This is commonly referred to s the "Gross Rent Multiplier" (GRM) which is essentially a figure derived by taking the price of the property and dividing it divided by gross rental income. While not a detailed analysis of a property, the GRM helps beginning real estate investors understand how to evaluate a property in term of cost-to-revenue projections.
3. Legal Climate for Landlords. Research the neighborhood's attitude toward investors. Every state and municipality will have variations regarding the interpretation of real estate contracts, eviction proceedings, certificates of occupancy, etc. Having a tenant live rent free for a period of months while you engage in cumbersome legal procedures can quickly turn your profit-seeking investment into a money-losing venture.
4. Understand the political climate. Before investing in any one area research whether there are anticipated property tax increases or upcoming assessments. The first can increase your financial burden while the second may either lower or increase the property's value.
5. Evaluate what role you wish to play. Are you comfortable with the idea of being a landlord, rehabber, or flipper? Will you be actively involved in property management or hand this over to a third party if you are purchasing property some distance away? Are you looking for a tax shelter opportunity to maximize the benefit of your retirement funds or because you want the security of owning property? Knowing why you are investing in property will help you choose the best type of real estate investment for your needs. For example, the needs of someone who wants long-term rental income will differ from the investor who seeks to flip and make a quick profit.
6. Consider all financing options. While mortgages are the traditional route to home ownership, beginning investors can also explore some creative ways to finance property purchases such as a rent-with-option, lease-purchases, bridge loans, or wrap-around mortgages. Many beginning investors also join real estate investment clubs wherein members pool their money to purchase property. With this last option, just be sure that all investors are on the same page with regard to strategy (i.e., long term or flipping).
7. Create a team of experts. If you are new to real estate investing, you want to build a team of experts who can help you navigate the sometimes confusing waters. Your team can include real estate agents, accountants, attorneys, bankers, home inspectors, as well as experienced investors. Each member of the team can value-add information to help you make an informed decision before investing thousands of dollars.
This blog post is by Daniela Baker. Daniela is a personal finance blogger at CreditDonkey, a small business credit website. She helps Realtors and other small business owners find small business credit card offers with the most rewards.