3 Critical Considerations When Investing in Real Estate (2024)
While KORE Accounting Solutions primarily works with attorneys and small law firms, we also have customers in other industries, many of which invest in real estate and/or manage properties. As a property investor myself, I’ve learned a lot from our customers and my own experiences. Our friends at the You Call the Schotz Real Estate Team (www.YouCallTheSchotz.com) asked that we put together some real estate investment considerations based on all that we’ve learned.
Top 3 Factors I Consider When Investing in Real Estate
Investing in real estate is not for the faint of heart. Generally, each real estate purchase represents a significant investment of money and effort, and it is not nearly as sure as bonds or as liquid as stocks. Still, the right real estate investment has the potential for reward which bests either of those. Even more importantly, with real estate more than many other tools, the investor is more in control of his investment.
However, in order to mitigate the risks, I consider these 3 factor to be the most significant:
Do the numbers make sense? There are various ways to calculate the return you’ll get. I recommend looking at the likely rental income less expenses (taxes, insurance, likely repairs) compared to the mortgage payment on the full price of the property. Additionally, you will likely put a significant amount of money towards the down payment/purchase of the property, and parting with this cash also carries an opportunity cost. It is important to get a good mortgage and know the going rental rates in the neighborhood you are buying, so make sure that you have a knowledgeable and trustworthy real estate agent and mortgage broker.
What is the potential for appreciation? Appreciation is the real upside of a real estate investment, but you need to do your due diligence to make sure that the area you are planning to invest in has a strong appreciation potential. Ideally, you want your neighborhood, and particularly your property, to appreciate more than the market overall. Again, your real estate agent is your main source of information, though there are other sources to check, such as city development plans. Unfortunately, even the savviest investors are ultimately speculating, so be sure to do thorough research before committing to an area or a property.
Can I carry it in an emergency? This is the most critical question – investing into a property you cannot carry for a significant period of time can lead to you losing all of your investment. While you hope that each property you buy will be a continuous source of income, the reality doesn’t quite work like that. There can be a gap month or two when you don’t have renters. For example, there may be repairs which may render the property unavailable. Even if these repairs are covered by insurance, the loss of income will not be, so you need to be sure that you can pay the mortgage, taxes, insurance, and utilities during the times your property is not bringing in income. For this, you need to have a good handle on your finances. If you derive a significant portion of your income from a business, you need to have your business’s books up-to-date and a thorough understanding of your financial reports. Your bookkeeper should be able to help you compile and make sense of this data.
Investing in real estate is a significant undertaking. It is not as simple as the TV infomercials make it sound, but if you keep your eye on the important issues and surround yourself with trusted professionals, it can be a rewarding and profitable endeavor.
Inna Korenzvit is Founder and Principal Accountant at KORE Accounting Solutions, a future-focused management accounting firm specializing in providing legal professionals and business owners with the data and insights they need to stay compliant and run more profitable firms.
Understanding positive cash flow, and the expenditures that can affect it, is the core of real estate investment calculations. Positive cash flow means your income from the property is more than your expenses.
Final answer: Real estate is characterized by immobility, indestructibility, and uniqueness. Immobility means it cannot be moved, indestructibility means the land itself cannot be destroyed, and uniqueness refers to the distinct attributes of each property.
Summary. If you follow these 5 Golden Rules for Property investing i.e. Buy from motivated sellers; Buy in an area of strong rental demand; Buy for positive cash-flow; Buy for the long-term; Always have a cash buffer.
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