The real estate arena seems lucrative and tends to attract many investors. But the influx of people towards this investment opportunity does not mean it offers easy wealth.
Real estate investment can be competitive and often risky. Given the hefty amount of capital often involved, one wrong move might lead you to the edges of bankruptcy.
So, it might help if you make your next investment move after doing some homework on the real estate industry.
In this article, we are sharing some helpful real estate investment tips that may give you an idea of how to maneuver through this competitive industry.
Real Estate Investment Best Practices
Real estate is often the first thing people think of when they want to make an investment. And it makes sense, why?
Real estate appears to be a low-maintenance, high-return sort of investment. But it is only when people get in do they realize, it is not as low maintenance as they thought, and the ROI also depends on a lot of factors.
Below are some tips to help you prepare for what the real estate industry entails.
Learn to Differentiate Between Apparent and True cost
Most novice real estate investors and home buyers underestimate the true cost of buying and owning a property.
The true cost of owning a real estate property can be significantly higher than the cost that appears on the listing.
There are lots of factors that add to the price, including initial upgrades and cleanups.
Apart from these initial costs, there are ongoing costs as well that make keeping a property somewhat expensive, or at least not free as some people assume it would be.
Once you buy a property, you have to pay for its regular maintenance, repairs, and upgrades.
Additionally, there may be emergency repairs and maintenance requirements as well that might need immediate attention and may be very costly.
Regardless of whether you want to rent the property out or hold it to resell later, these costs will appear in your bill.
Then there are fees and other ancillary costs like HOA fees and property taxes.
You might be able to adjust taxes and HOA fees in the rent if you are renting the property out. But if you are keeping it to resell later, these charges may further increase the cost of owning a property.
Therefore, it may help to consider all these charges and expenses before investing in real estate so you can budget for them beforehand and potentially avoid financial disaster.
Consider Buying Properties in Emerging Neighborhoods or Suburban Areas
“Buying property in the up-and-coming neighborhood before the value increases is the best possible investment”, writes Beatrice de Jong, Real Estate Broker and Consumer Trends Expert at Opendoors [1].
Well-developed areas are usually at the top of the curve, there cannot be any more development, and the properties there are often at the peak of their value.
Emerging areas and up-and-coming neighborhoods, however, promise future value [2].
Since these areas are yet to qualify as “well-developed” the properties here tend to be relatively cheap [3].
Once the developments begin, property prices and rentals may climb, potentially resulting in profits for investors who chose these neighborhoods before the developments arrived.
Of course, investing in up-and-coming neighborhoods may involve a trade-off between price and lifestyle. However, it might be worth it in the long run.
Do your research about the emerging areas on your list, talk to the locals, state agents, and real estate experts, and only invest once you are sure the investment would be worth it.
If you cannot seem to settle on an emerging neighborhood, consider suburban areas.
Suburban Areas May Offer Good Investment Opportunities
The onset of the pandemic has led to a boom in suburban real estate [4]. Millennials are leading the exodus of the young population from the cities towards suburban areas [5].
These areas are less crowded, often offer good amenities and facilities, and a peaceful lifestyle.
And the prices of suburban properties tend to be lower than those in urban areas where the properties are expensive and can be harder to sell.
For example, the average sale price of a home in downtown Boston is around $2.15M but the real estate market is not very competitive and houses on sale rarely get multiple offers [6].
On the other hand, the average price of a home in Belmont, a western suburb of Boston is around $959K, and the market is very competitive, with one home receiving 6 offers on average and selling within 21 days [7].
So, consider suburban areas while looking for properties to invest in. They might be more profitable than crowded cities in the long run.
Do your research about these areas as well, talk to experts, look at your financial situation and then decide accordingly.
Choose the Location Carefully
Location is often the single most important driving factor behind a property’s value [8].
And we can see why.
All other features of a property can be changed, but the location is something that is fixed.
So, be extra careful when selecting a location for your real estate investment.
A few factors to consider are:
- Accessibility. It might help if the property is close to major commute routes and is accessible from more than one entry point.
- Proximity to basic amenities. People prefer having shops, restaurants, and grocery stores nearby, but not too close.
- Quality and distance of local schools. Potential buyers or tenants may have kids and would want them to go to nearby schools. So proximity to good quality schools might make your property more valuable.
- Low crime rates. This one is a given. You can talk to the locals to discuss the crime situation in the area. Try and invest in areas that are peaceful with low crime rates.
While you consider and prioritize proximity to basic facilities and amenities, don’t forget, certain structures and facilities tend to reduce property prices, these include, funeral homes, hospitals (ambulance noises), cemeteries, shooting ranges, etc. [9].
Consider all of these factors and then select a location that you think may promise a good return. Talk to real estate experts and agents for better assistance. But take their suggestions with a grain of salt as they may have their own interests involved.
Good is Important. The Ultimate Best – Unnecessary
Spending more does not always translate into greater value, especially when it comes to real estate.
When real estate investors upgrade their properties, they are often inclined towards adding high-end features to make their property more valuable.
Of course, upgrading elements that enhance the curb appeal or functionality of your home may be worth it, but it might be harder to recoup the price of extravagant and unnecessary features like swimming pools, granite countertops, or wall-to-wall carpeting.
Many potential buyers may not be willing to pay more for a home just because it has high-end features [10].
Therefore, it might be nice to have a budget and go for things that are necessary and good, not unnecessary and the ultimate best.
Understand Real Estate Cycles and Time Your Investments
All professional real estate investors tend to time their moves according to real estate cycles.
A real estate cycle comprises of four phases, including:
- Recovery,
- Expansion,
- Hyper-supply and
- Recession.
Real estate investors have dedicated strategies for each phase of the cycle.
The economy is suffering during the recession and properties prices have hit rock-bottom. As the recovery phase rolls in, the prices are still low after the recession. This is when most real estate developers make their investments and buy lower-than-market value properties.
After the recovery phase comes expansion when the situation starts to stabilize and people gain confidence in the economy. Consequently, this phase results in a surge in property demand, which leads to increased property prices. This is when real estate investors mostly sell their properties.
Then, supply begins to exceed demand as we enter the hyper-supply phase. Prices drop again and most real estate investors buy properties and hold them until the prices rise again.
Having a deep understanding of real estate cycles may help you predict the right time to buy and sell properties and determine the expected return on investment.
So, take the time to learn about real estate cycles before going in (or any further in) into real estate investment.
Final Word
Real estate investment attracts beginners because of how simple it appears to be. But you might end up losing if you take it lightly.
Don’t be blindsided by the apparent price tag dangling on certain properties. Owning a real estate property may be way more expensive than the price on the tag.
Additionally, consider investing in up-and-coming or suburban areas as the properties there might promise better returns. But before you go in with your money, make sure to research the location and ensure it will add value to the property instead of taking away from it.
Also, it might help if you understand real estate cycles and make your investment decisions accordingly.
Real estate is a hefty investment. If you are unsure about any aspect of it, talk to your financial professional. They might build strategies that may help you get in safely and build a potentially profitable portfolio.
At Dayton and Sydney, we have experienced wealth and financial strategists who can help you with a personalized financial action plan as you prepare to make important financial decisions.
Equitable Advisors, its affiliates, financial professionals, and employees do not offer mortgage loans, real estate brokerage or any related advice or services. This article is based on information provided by various third-party sources and is for informational purposes only. Equitable Advisors and its financial professionals offer no guarantee as to its accuracy or timeliness of the provided information. You should consult with qualified and appropriately licensed mortgage, real estate, tax and/or legal professionals regarding your needs, questions and particular circumstances.
References
1 “Four Characteristics Of An Up-And-Coming Neighborhood (And Why You Should Buy Your Next Home There)”, Beatrice de Jong, Forbes, Oct 22, 2019.
2 “Four Characteristics Of An Up-And-Coming Neighborhood (And Why You Should Buy Your Next Home There)”, Beatrice de Jong, Forbes, Oct 22, 2019.
3 “Why Buying Real Estate in Up-and-Coming Areas is Better Than in Established Areas”, MBA Mortgage.
4 “Home sales in the suburbs are red hot right now”, Chris Morris, Fortune, Nov 23, 2021.
5 “More millennials now live in suburbs than in cities”, Megan Leonhardt, CNBC, Nov 20, 2018.
6 “Downtown Boston Housing Market”, Redfin.
7 “Belmont Housing Market”, Redfin.
8 “The Factors of a ‘Good’ Location”, Tara Struyk, Investopedia, March 10, 2022.
9 “10 Surprising Things That Decrease Property Value”, Amanda Prishchak, Dec 16 2020.
10 “6 Things You Think Add Value to Your Home But Don’t”, Jean Folger, June 30, 2021.
