Real estate is generally known to be a great investment. The amount of options available are endless, meaning each investor is likely to find their niche in the industry. You have the potential to make a substantial return on investment and you can be as involved as you want thanks to property management companies. Before you jump into investing, however, there are plenty of things you need to think about…
Think About Residential and Commercial Properties
Both residential and commercial properties have their benefits and drawbacks, so your first step is to decide which would be right for you. When it comes to residential properties, a smaller upfront investment is required, it is relatively easier to sell and it is associated with a lower risk than commercial property. Yet, the returns are lower and the tenant turnover is higher.
For commercial properties, the longer lease involved can be very beneficial for the investor as less time and money is spent on finding new tenants every year or two. Many risk takers invest as an alternative means of paying off debt, so this would be a good market to do that. Additionally, the potential returns are much higher, but this is a result of the increased upfront investment and higher risk associated with the market instability. Finally, you can easily step back and use a commercial property management company if you do not want to be overly involved.
Generally speaking, residential property offers a lower risk, lower returns investment, whilst the commercial market provides a higher risk, higher returns investment. Your budget and willingness to take a risk will depend on this decision.
Find Your Target Audience
Once you have decided whether you will be investing in commercial or residential property, it is time to decide who you will be targeting. For residential it could be families, older couples, young professionals or students. With commercial property, you might target buildings that could be office spaces, hotels, retail shops, industrial warehouses or shopping centres.
All of your subsequent decisions will depend on who you want to target. Deciding this early on will put you at a huge advantage, as you will be able to identify exactly what your potential customers will want. If you are able to do this, the demand for your property will increase, thus the potential profits also rise.
Save 10% On Top of Predicted Spending
When you create a budget for the investment, you need to have around 10% saved on top of your total budget as contingency money. For example, if you budget £1,000,000 for the investment, ensure you have £1,100,000 saved. As you plan how much each element of the purchase, renovation and associated bills will cost, make sure that you budget for the absolute worst case scenario to avoid any financial shortfalls before you begin! Then, if anything does go wrong, you have that extra 10% to one side to sort any issues. Teething problems in your new property is highly likely, so having the money there to rectify them quickly will be essential to make your investment a success.
Assess The Risks Involved
As with any investment, risks are involved. With residential property, the market prices fluctuate dramatically, tenants can be very specific about their needs, your money is tied up in assets for years and the cost of maintenance can be substantial.
With commercial property, it can take months to sell or lease out a property due to the commitment involved, you need substantial insurance to protect yourself against the liquidation of businesses and the market can be volatile meaning you can quickly lose money. Whilst you have more control than with other investments, such as mutual funds, you are also more responsible, so this is a risk to take into account.
It is absolutely essential that you complete a thorough risk assessment prior to investing in order to have a plan in place. If anything goes wrong, you must be in a strong position to quickly mitigate the problem to keep your tenants happy.
Consider an Auction for Purchase
Property auctions can be fantastic options to help you get a good deal on residential or commercial property for sale, thus increasing the possibility for higher profits in the future. You would find a local property auction website, see which properties are available, view the ones you were interested in and then make bids at an auction.
The important thing here is to not get carried away. The benefit of a property auction is that you are likely to get good value for money, but if you keep bidding you will end up paying much more than you should. So, do you research and go in with a budget for the best results.
These are just a few of the things you should be considering before you invest in any kind of property. The best piece of advice is to do plenty of research in order to make sure the investment is definitely right for you!
Pearl M. Kasirye is a writer at Pearl Lemon Properties, editor, and researcher who spends most of her time reading. When she isn’t reading or working, she can be found sitting on her balcony writing her own novels or traveling.