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7 Rules For Real Estate Investment

Posted by Plakads Realty on March 15, 2022
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Real estate investing may appear difficult but it is not as difficult as it seems. Once you know the rules, you can play by them and eventually succeed in the following field. Real estate investing is no different so if you follow the basic principles of long term investing, you may have much higher returns compared to fixed deposits and other debt mutual funds. The main essence of this grade of asset is that the money is relatively secured in the underlying asset, which is not that speculative. Real Estate grows at a stable rate offering low risk but also fewer returns compared to many asset classes. But when done well, we can work on maximizing returns with a marginal increase in risk. Though, there are some things one should keep in mind to be a successful property investor.

Due Dilligence

Constantly educate yourself so you become confident and well-informed and always do your due diligence before investing. Take the advice of professionals and experts as they can guide you in the field, just like you can’t become an engineer or a doctor overnight, you can’t possibly know all the intricacies of real estate but with time and correct company, you will get there.  There are so many free and valuable resources available online so you won’t need to spend money on becoming investment savvy.

Be systematic, consult experts and maintain a checklist. You won’t have to rely on information from the other if you have a plan for due diligence. Starting with a physical inspection of the property, talking to the neighbours and building maintenance team. Check for code and zoning compliance, and never assume that the property’s current use is permitted.

Location, Location & Location

A good location can mean different things to different people, but the location is what translates into profitability for the real estate investment. The purpose of choosing a good location is that it creates the desire for the buyers to purchase and the desire, in turn, creates demand which raises the price. 

The real estate market works on location viability so check if the location is commercially viable as there is no point in having a property in the middle of the desert or jungle where hardly anyone visits with no easy transport facility. 

The property gives returns to the investor through two avenues – Rent and Capital Appreciation which are heavily dependent on the location so look for locations that have less than 10% vacancy that means supply is good and the tenants are not likely to vacate the place which leads to higher rents and capital appreciation.

Demand & Supply

When the demand is high for properties due to an increase in popularity of a community or particular market the price rises. This puts property sellers in the excellent position of accepting bids at or above the asking price which raises the price in turn. Real estate is just as receptive to supply and demand as residential. High demand in land development is often bound to property scarcity as well. The dependency of real estate supply is on the amount of housing, buildings and properties which are available for transactions. So find a segment where there is limited potential for supply and steady demand, that is where value is created.

Structure Is Crucial

When you buy a property, you want to make sure of its construction quality. Suppose there are two buildings, one with higher quality and the other with lower quality in the same location, which one would you choose?

It is obvious for you to choose the higher quality property. The higher quality will always get rented first and will also attract tenants who want premium quality for rent or to buy. Always look for buildings with nicer lobbies, more lift banks, higher ceiling heights that have a better view from the place. Lastly, look for paint and plastering quality and also make sure you ensure the safety features of the building.

Interior Quality Matters

As a real estate investor, you have to isolate yourself from the property’s appeal.  An office fit-out can create a first impression in the buyer’s mind. By investing in some luxury interior fit-outs, you can improve the value of your property, and make a great return on your investment. 

Interior quality matters but one need to take that with some salt. Just like a Mercedes loses a significant value when it rolls out the showroom, interior finishings don’t always increase the value proportionately.  Not everyone will have the same taste or use for the property. There are some tenants who like to do their own fit-outs on the other hand, some ask the developer to do it for them for which they pay an additional fit-out rent so a tenant who did his own fit-outs is more likely to stay longer in order to fully recover the costs. 

Know thy neighbour 

Be it a commercial, industrial or especially residential property, the quality of the community makes an important impact. A strong community drives resale value with personal recommendations and increased societal value. When the developers are strong and established, the transition from developer to the committee is smoother and adds to the community. So always keep an eye on the surroundings as that is also a very crucial factor in making a decision.

Agreement Structure 

The process for a property or office unit may be a little different from the due diligence ventured for the purchase of a plot of land. In almost all cases, a flat might be constructed as part of a structure. 

The general clauses in an agreement to lease or a lease deed are these provisions usually are relevant to the term of the lease, the right to renew the lease, the rent-free period, security deposit, the payment of lease rent. The structure of commercial space is 3+3+3 or 5+5+5 meaning a 9-year or 15-year lease with escalations every 3 years or 5 years.  Also that the tenant can vacate at any time although the landlord can never ask them to leave for the lease period. 

In real estate investing, security deposits are a very important aspect of the lease for properties which is normally for 10 and 12 months of rent.  The landlords will always clean the property before showing any vacant property and renting to a new tenant but if the previous tenant leaves it filthy then the landlord must pay for special or additional cleaning services, as they can use the security deposit of the previous tenant to cover the cost of renovation. And if a tenant skips out without paying the rent, the security deposit is there to compensate. Lastly, Don’t allow tenants to use security deposits as the previous month’s rent. The security deposit usually is an interest-free deposit. Try avoiding tenants who are looking for a short-term option as they might have cash flow issues which are usually start-ups those who tend to ask for smaller deposits.

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