Location and Timing
Everyone knows about location, location and location! But timing is an art and a science. A good location may be fail to maximize the potential of investment property if the timing is wrong. During downturns for instance, the property may take long to attract buyers or tenants despite being in a good location. This kind of situation can sink an investor’s ship especially if they are over-leveraged. Furthermore, the investor will have to wait longer for the recovery of their investments, incurring a disability on their capital.
Know your clients
Real estate investment classes are more diverse than ever before. Different segments have different needs and therefore require different levels of specifications. Some investors only build for students, others for families while commercial property investors focus on businesses and so on. Knowing which segment of the market you are dealing with can investors in forecasting the industry trends, assessing risks and designing market strategies. On the contrary, approaching the market haphazardly involves dealing with too many variables, increasing the risk.
Consider the competition
Real estate investment has existed for centuries, implying the potential for competition in the local market you are interested in. Competition or the lack of it plays out in the supply and demand equation, which determines the price point. In certain markets, the investor may want to factor in the effects of an increase or a decrease in supply when evaluating the investment.
Get the facts
Snake oil salesmen will show you one side of the coin, they will tell you just what you want to hear to get the deal done. Behavioural finance experts call this tendency, the one that gets people hooked up to cooked up tales, the narrative fallacy. So go ahead and get the data, it’s key; you may not like it but you will need it in the game of real estate investing. Have you researched the local area’s microeconomics, what about the demographics? Did you check the physical and social infrastructure? The comparables? And then there is the ‘small’ matter of regulations. Get it all.
Sit down and calculate the cost
Be skeptical with the numbers, it’s an act of prudence. The first responsibility of any investor is to avoid loss of capital. Even though land and property is generally assumed to appreciate in value, this is not necessarily so. The investor must count the opportunity cost and weigh the risk. The general rule is to avoid getting involved (by putting in the money) before understanding the risks (all of them). What is the worst-case scenario and the negative cost? By protecting the downside, you can focus on the upside.