The sensible approach to real estate investment
Real estate investment can be a good way of making money but, like any investment, things can go wrong. An investor, therefore, should not put all of his or her money into real estate, but as part of a diverse portfolio it can be a good option.
No quick route to riches
No-one should go into property investment thinking that it is a get-rich-quick scheme. Investing in property takes time and hard work, but it can give an investor a long-term sustainable source of wealth. Many investors forget that it is important to invest for positive cash flow each year.
There is no such thing as a risk-free investment, but property investment can be profitable. The key to success is research. An investor should find a good area and a good property and check the track record of the developer (if purchasing off-plan) or the owner. The investor should then check the property. If buying off-plan, check that the developer has planning permission. If buying a property, check that the seller is the legally registered owner of the property.
Emotional investment
Another common mistake is to purchase an old property that requires some renovation and then invest too much emotion in it. Granite worktops are attractive and for an individual’s own home the expense may be worth it, but for an investment property the aim should be to renovate the house to a good standard, but with no more expense than necessary.
Running the business
Some investors who purchase properties to rent out do not do the work that is required. Tenants must be screened if problems are to be avoided. A bookkeeper should be employed to ensure that everything is running smoothly. If investors are unable to manage the property themselves then a good management firm should be appointed to screen tenants and deal with any issues that may arise.
Debt
Property investors need to know how to use debt, how to negotiate it and how to manage it. It is important to ensure that revenue will exceed the costs. Investors must remember that properties will need repairs, and interest rates can change. Investors should stress test their portfolios to determine at what point rising interest rates will force them into a negative cash flow situation. This can be used to determine when further financing is required, or when it would be a good idea to sell.
Property funds
For investors who do not want a hands-on approach to property investment, property funds can be a good alternative. Property funds offer investors incredible diversification as by entering into a fund the investor is purchasing a part of someone else’s property. Entrance levels can be low and investors can also examine the past track record of the funds before investing, although this is no guarantee of future performance. It is likely that the returns will be lower than with a more straight-forward property investment, but the risks will be lower and the investment terms much shorter.
REITs
Real Estate Investment Trusts are similar to funds and allow for considerable diversification. The percentage payouts for profitable performance are often set by law. As with funds, REITs can be tracked and their past performance assessed. Entry levels are low and they may carry some tax benefits, making them attractive to smaller investors.