There’s no question that the right investment property is an incredible financial opportunity. Whether you purchase a residential or commercial property, tapping into its potential, such as renovating and then renting out a space, can help you generate passive income and even turn a nice profit when you eventually sell.
1. Your Overall Goals The most important thing is to keep in mind why you’re investing in the first place. Are you investing to have more passive income that will allow you to spend time with loved ones? Or do you want to build a huge real estate empire to give millions of dollars to great causes? There is no wrong answer. But what and how you invest should clearly pave a path to accomplish your why.
2. Economic Trends And Drivers Within the framework of looking at an economy (of any given scale, micro or macro) as a living and breathing organism, it’s often best to think of growth engines, disruption engines and sustainability engines. Understand what market the asset will be serving and how those three engines tie into it. From there you can start to build an effective analysis of the key factors of price per square foot or square meter, the in-place rent versus expenses on that same basis to distill a margin and, lastly, how that margin effectively ties into your target yield and over what time frame.
3. Your Personal Financial Situation Ask would owning this investment property help me achieve my goals? Each person’s personal financial situation is different and investment properties generate unique financial outcomes. Some might require smaller investments and incur fewer costs along the way, but produce little to no ongoing revenue for awhile. Others will require larger upfront and ongoing investments, but will generate greater cash flow right away. And, there are variations all across the spectrum of inventory. Know your own financial situation first, including your ability to cover unexpected costs along the way, before you make your choice. But, most of all, think about why you’re considering an investment property in the first place to be sure you select one that actually has the potential to produce your desired outcome.
4. Community Considerations And Opportunity Zones While return on investment is the most important factor for most property investors and developers, my principal interest involves life science real estate, especially in opportunity zones. Investors and developers must be prepared to answer important questions that stretch beyond their own monetary returns. Developers who fail to do so may well find themselves taken to task by attentive local and state leaders. While community considerations might be ancillary to conventional developments, they are vitally important in opportunity zone projects, especially now. Fund managers must be prepared to address them if they hope to preserve their tax benefits and eventually profit from their acquisitions. They can still enjoy rich returns, but only if they genuinely commit to community revival.
5. Plan Ahead For Repositioning And Downturns When considering an investment property, while it is important to confirm the property meets your cash flow and investment criteria, as an investor the best thing to keep in mind is how you can strategically reposition the asset to increase your returns and confirm you are prepared during downturns in the market. Real estate is a fabulous tool to build wealth as long as leverage is used appropriately and you are in control of the timing when it comes to the sale of the asset.
6. Your Expected End Result For The Property Know what you want your end result to be. Are you looking to buy and move-in? Buy and lease? Buy and sell long-term? Your role in the transaction varies depending on your end result. If you’re looking to buy and lease, expect landlord duties. Whatever your decision and desired outcome is, be sure to evaluate all options to see which suits your current lifestyle
You shouldn’t just buy the first property you come across that looks interesting—if it’s the wrong fit for you, you likely won’t see the results you anticipated, and may end up with a vacant money pit.
Forbes Real Estate Council – September 2019