The most successful real estate investors never rush blindly into a purchase, instead full research is carried out to assess the realistic investment potential. Being well informed in both high and low risk investment locations will assist with devising aversion plans to avoid any potential issues that may arise.
Dedicated investment companies will carry out extensive research prior to offering properties to their clients. Comprehensive research will not only provide an insight to the property itself, but also the economic and political stability of its location.
Understanding the property and its location in detail provides further assurance that the property presents an optimum investment opportunity. Knowing what to search for when selecting an investment property will enable clients the ability to confirm facts and figures for peace of mind.
Return on Investment
The realistic return on investment is one of the main initial factors to consider. The return on investment is essentially the amount of money the property will make through capital appreciation and yield returns prior to selling.
If a property is unlikely to provide the expected returns to make it a viable investment opportunity in the amount of time the buyer wishes to maintain the property, another property or location should be considered. Taking into account the annual maintenance fees and taxes, along with the associated selling costs, is essential to ensure correct calculations are made.
The return on investment is one of the areas where risk factors come into the equation. Emerging markets have traditionally provided the highest returns in the shortest period of time, while the established markets provide slower, yet more stable and less risky returns.
The current world real estate market situation has changed many investor perception of the fast returns potential of emerging markets. This has led to an increased interest in the secure returns of established markets.
Political and economic research into investment locations is essential in emerging markets. Understanding the economic growth factors of the country can provide some insight to the mid and long term market value and demand. This is also important for understanding potential exit strategies for selling the property in the future.
A country’s susceptibility to variations in long term economic stability can determine some of the investment’s risk factors. For example, emerging markets reliant predominantly upon tourism for growth present risks to real estate investors, as the country’s economic environment is not sufficiently varied. While the market may appear to be in its initial growth stages at the time of purchasing, market expansion will depend upon continued demand and interest in the region.
Re-sale potential is significantly improved in locations where the domestic population is capable of accessing the real estate market. In regions where the property is significantly overpriced for the domestic market, re-sale possibilities will be limited to other foreign investors. This can pose a problem if at the time of selling buyers are more interested in newer, possibly cheaper property in a more easily accessible location.
The subject of political stability can also include the government’s encouragement to actively attract foreign investment and tourism to the country. If a country is not entirely welcoming to foreign investors the purchase process may be difficult, followed by difficult re-sale potential. Issues such as civil unrest in developing nations can significantly devalue a property or lead to ownership right issues. To avoid these issues, it is vital to only consider emerging markets with political and economic stability.
The price of the property is one of the initial considerations when sourcing a real estate investment. As property prices have reduced significantly in many established markets worldwide, the mid-term return potentials enable greater scope when investing in the current market. The economic stability of emerging markets for investment is now more important than in recent years to protect against financial losses.
Researching the surrounding market will help to ensure the property is not over priced by comparison. If the property presents a higher price, consider the reasons why before discounting it immediately. There may be security features in place, such as guaranteed rental returns, guaranteed buy-back opportunities or other features such as furniture packages included.
If this is the case, consider the additional costs that are covered in the security features and associated extras. These costs may include furnishing the new property, maintenance and advertising charges for placing the property onto the rental market, or the effort to find buyers in the resale market at the time to re-sell. If the more expensive property still does not present a viable investment option in its market, it may be wise to look into another development.
Accurate Cash Flow Analysis
A comprehensive understanding of the required financing for a property will assist with analysing the full financial overview. Associated purchasing costs vary significantly from country to country and can sometimes differ between residents and non-residents. Full consideration is required for accurate cash flow estimations and knowing whether the property and the returns present a truly viable investment opportunity.
After taking into account all the additional expenditures, the exit strategies and any other outside factors, a comprehensive understanding of the full investment potential and genuine returns for the investment can be assessed.