Starting Out? Here's What to Look For As A Property Investor

Thinking of getting started in the world of real estate investment? It’s an excellent way to build wealth and secure your financial future. But just like any other investment, it is very important that you approach it with careful consideration. Whether you are eyeing your first rental property or planning to do flipping houses, understanding what to look for as a property investor is the foundation of your success. This guide will provide you with the foundational knowledge to navigate the property market and make informed decisions.

Understanding the Basics of Property Investment

Property investment simply refers to the different ways that people acquire, own, manage, and sell real estate for either income or property appreciation. 

Property investment is available in a few types of property, all with different opportunities. Residential properties such as single-family homes are popular for beginners because of their familiarity and smaller size. Commercial properties usually provide higher income but they also require bigger investments and more expertise. Industrial properties often boast long-term leases and steady cash flow. Each type has its degree of risk, potential income, and capital needed.

The potential benefits of property investment include:

• Potential for long-term wealth growth
• Regular rental income
• Tax advantages (e.g., depreciation, capital gains tax)
• Hedge against inflation

Consequently, some risks are: 

• Market volatility
• Negative cash flow
• Property management challenges
• Economic downturns

What to Look For As A Property Investor: Key Factors

Getting started, it’s crucial to focus on several key factors on what to look for as a property investor that may heavily make a difference in the success of your investment.

1. Location of the Property

The property location tends to be the most singularly important factor regarding long-term value and rental income potential. A good location can appreciate in property value; a poor one can make it stagnate or even depreciate. Areas with good demand, such as those around schools, public transportation, shopping centers, and employment hubs, have higher rental yields and attract prospective tenants. To put it simply, property location can make or break your investment.

2. Property Valuation

Property valuation involves determining the current market value of property based on its location, condition, and even similar sales within the area. Basically, for property investors, understanding valuation is critical in ensuring they pay a fair price and the property eventually generates the expected returns. It prevents real estate investors from overpaying for an investment property. 

The three major approaches to property valuation are comparative market analysis, income approach, and cost approach. To understand better how property valuation works, read our comprehensive article about how to assess property value.

3. Type of Construction

The type of construction used is important in property durability and its long-term value. The construction type and materials used will indeed affect how a property may stand the wear and tear and even withstand a hurricane or any natural disaster.

For example, brick or concrete properties tend to be more durable and require less maintenance than those made from wood or timber-framed buildings. Properties constructed with higher-quality materials may have higher upfront costs but can save you money over time by reducing ongoing maintenance needs.

4. Property Condition and Age

A thorough inspection would ensure that any possible problems that could affect the value of the property are found out. While older real estate properties sometimes have character and charm, they often come with their own hidden problems: outdated plumbing, electrical systems, or structural wear. 

More critically, though, a property's age affects its condition and its capability to appreciate even further in the future. Considering a property based upon its current condition and actual age helps the investor not only understand the exact current position but also gives a calculated account about sustainability pertaining to future potential returns.

5. Purchase Price

The purchase price of a property is what you buy it for and provides a basis to calculate your return. It further affects other financial metrics involving ROI, capitalization rate, and DSCR-all useful in understanding the potential involved in the long-term investment.

Do some research online using sites like Zillow or local government data to get a general idea about the trends in property pricing. Look for potential discounts that can be negotiated based on the condition of the property or the state of the current market. For instance, if the apartment badly needs repairs or renovation costs, you can try bargaining for a reduction of property price, factoring in those additional operating costs. 

6. Days on Market (DOM)

Days on Market (DOM) is a metric indicating the average timeframe a property is actively listed for sale before it's either sold or taken off the market. This metric indicates the liquidity and desirability of the property market in an area.

A shorter DOM typically suggests that properties are in high-demand areas, with buyers eager to make offers. This is common in hot markets where there’s strong competition and limited inventory. An overly lengthy DOM suggests there could well be oversupplies in property availability and either indifference by home buyers or inflated asking price. 

7. Cash Flow Analysis

Cash flow is essential for property investment as it projects the rental income any property will make. Cash flow analysis helps in knowing whether such a property will give a good return on investment or if the investment will turn into a burden.

To do a monthly cash flow analysis, the first thing you will do is to project the rental income you will receive from the property. Next, you will subtract the property expenses: the month-to-month expenses, such as mortgage payments, property taxes, insurance, maintenance, management fees, utilities, and other operating expenses. After projecting consistent income and operating expenses, you will find out if the property produces either positive or negative cash flow.

One general guideline could be aiming for no less than 8% cash-on-cash return, making sure the investment is truly worth your time and money.

8. Population Growth and Demographics

The success of real estate investments is heavily influenced by population growth and demographic trends. These factors essentially drive the demand for property. With a growing population often comes increased demand for housing that may translate into higher rental rates, appreciation, and ultimately long-term profitability.

People migrate to areas that have economic opportunities, less crime rate, and are well-endowed with infrastructure. These people tend to increase property demand, especially rental homes.

9. Employment Rates

One of the critical considerations in any property investment is the proportion of the population employed. In general, higher levels of employment translate into more stable demand for long-term rentals, as more people with jobs will be in a position to rent a house or apartment building. Strong local job markets attract residents who can typically pay rent.

Look for job gains in higher-paying areas: technology, finance, healthcare, and education. These kinds of jobs typically draw in well-paid people and they could well afford more rents, which again gives a stable rental stream. 

10. Proximity to Amenities

The proximity of a property to amenities, such as schools, transport, and shops, determines its appeal to prospective tenants and overall value. Properties near major amenities can command higher demand. When tenants have easy access to daily high-order and leisure activities, they are more likely to choose a property. Moreover, amenities can significantly impact property value, particularly in both residential and commercial types of property.

In commercial real estate, proximity to amenities such as schools, hospitals, shopping centers, and entertainment is even more important. For instance, retail shops, restaurants, or office buildings near big shopping malls face higher foot traffic, which converts into increased sales or rental income.

11. Rental Yields

The major performance indicators in property investment are the rental yield. It reflects annual passive income from rentals in relation to the purchase price of the property. It is a powerful tool for investors when it comes to judging the profitability of a rental property. The formula to compute the yield for rentals is:

Rental yield is an important factor because it directly influences positive cash flow and return on investment. A higher rental yield means a bigger amount of rental income in consideration to the purchase price. Investors use rental yields as yardsticks for comparing properties on profitability, making them better investment decisions on where their money should be invested. It also acts as a benchmark against which the performance of real estate investments is measured against that of other asset classes, such as stocks or bonds.

12. Resale Value

Resale value is an estimation of the amount a house can realize in a future sale. It is an important consideration for property investors, as it determines the potential capital gains on selling the property. A higher resale value allows investors to profit not only from rental income but also from the appreciation in property value over time.

It's wise to invest in an upcoming infrastructure project to maximize resale value. When development is taking place, such as a new transportation line, commercial properties, or residential areas, the demand for properties increases. Such improvements make the location more attractive, hence increasing the value of the property. Monitoring local and future development plans and urban growth strategies can provide valuable insights into areas with strong future appreciation potential. 

13. Capital Growth

Capital growth means increased value in the particular property. Unlike rental income, which may be considered more or less immediate, capital growth represents appreciation over time. Investors can sell the property at a higher price than its original purchase cost. This growth is a key factor in building wealth through property investment.

To maximize capital growth, it is beneficial to focus on emerging markets or gentrifying neighborhoods. These areas often experience rapid development and increased demand, which can drive up property values at a faster rate. By identifying areas on the cusp of such transformations, investors can capitalize on higher growth rates before property prices rise significantly.

14. Property Features

When considering a property investment, it's crucial to evaluate the features that will make the property more attractive to potential tenants or buyers. Among the basic features worth investing in, which will actually pay back in adding value to one's property, are parking and security systems. These features can directly impact long-term tenant satisfaction and rental demand. 

Amenities and features should be sculpted in a way to appeal particularly to the target demographics involved. Examples of features more appreciated among younger renters, for instance, by millennials, may include aspects like co-working spaces, pet accommodations, etc. 

15. Value-Adding Potential

This relates to the potentials existing within a property that would give an investor the ability to add on value through strategic upgrade opportunities. This may be more significant for those investors trying to maximize returns above purchase price through enhancements that enhance either appeal or functionality.

Upgrading a kitchen or a bathroom will significantly improve the value of a property since they are the two 'high-impact' areas where prospective tenants and buyers would tend to look. Adding extra rooms, such as converting a basement or attic into livable space, can also make a property more attractive.

16. Maintenance Costs

Maintenance costs are among the most important aspects when considering investment in property. If these additional costs are not budgeted correctly, they may make a dent in your return on investment. Lack of attention to ongoing maintenance can lead to bigger and more costly repairs later on, cutting into the profits.

Common maintenance costs for properties include roof repairs, plumbing problems, landscaping, HVAC maintenance, and general repairs due to wear and tear. With rental properties, there are regular maintenance needs as well in order to continue keeping the tenants satisfied.

17. Tax Considerations

Tax consideration is an integral factor in property investment, with huge implications on overall profitability. Certain common deductible expenses include mortgage interest, property depreciation, property manager fees, and repairs and maintenance.

Proper tax planning may make all the difference in one's bottom line. Thus, without saying, consultations with a real estate professional are greatly encouraged regularly to leverage on all relevant tax benefits regarding one's property investment.

Read more: Step-by-Step Buying Process For Your First Investment Property

How About Indirect Real Estate Investments

Indirect real estate investing supports alternate ways of exposure to a desired real estate market without buying. Besides gains in real estate, one can avoid responsibilities and manage risks out of physical ownership.

Some popular types of investments include:

1. Real Estate Investment Trusts (REITs): REITs pool together capital from different investors towards land acquisition and other forms of real estate for operation and management. They pay the investors consistent dividends over time.
2. Real Estate ETFs: ETFs offer a diversified way to invest in the real estate market without buying individual REITs or properties. Some ETFs trade on a stock exchange, thus allowing for liquidity and flexibility.
3. Crowdfunding Platforms: Through crowdfunding platforms, individual investors pool a sum of money to finance either a real estate project or investment. Most crowdfunding platforms allow access to a wide array of investment opportunities.

Indirect real estate investments offer liquidity, diversification, and a more flexible way to gain exposure to real estate markets. As part of common strategies for property investors, it’s crucial to conduct thorough research and carefully evaluate the associated risks before committing to these investment vehicles.

The Bottom Line

Starting out as a property investor requires careful planning, thorough research, and a clear understanding of the key factors of what to look for as a property investor. Whether you are directly investing in physical properties or taking indirect routes such as REITs and crowdfunding platforms, your decisions should be in line with your financial goals, risk tolerance, and market conditions. Real estate remains a powerful wealth-building tool but is not without its challenges. Staying informed and adopting a proactive approach will set you on a path to success.