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Monday 27 October 2014
Real estate: Some tips for new investors
Real estate: Some tips for new investors
An investment in real estate is likely to be one of the most significant financial decisions you will ever make. A tremendous sense of pride, fulfilment, stability and security comes with owning your own property, particularly your own home.
Increasing property prices and the demand for quality rental accommodation mean that, with a carefully selected and well-managed rental property, landlords can enjoy a return on investment not just from capital appreciation but also from the steady stream of passive income. Even where there are downturns in property values, properties generally continue to rent and often without a corresponding decrease in the rental income.
Most people borrow to buy property. Before you buy a property, be sure that you can actually afford it and are able to service and repay the debt. Having a pre-approval in place will save you time and energy as the lender would already have reviewed your financial status to determine how much you can afford and how much they are prepared to lend you.
Apart from the actual purchase price of a property, which reflects its location, features, age and condition, there are other significant transaction costs that come to bear including lenders fees, valuation and survey fees, estate agents fees, legal fees, transfer taxes, stamp duty and insurance cover.
Whilst the documentation requirements can be cumbersome and can make investing in real estate somewhat tedious, it is important for the security of your investment that all documentation reflecting the true title of the property is in place.
Seek professional advice to determine the most appropriate structure. There are implications for you and your heirs for holding title in your name, in the name of your beneficiaries as well as in the name of a trust or a limited company.
Real estate is relatively illiquid and it is risky to invest with a short-term view. Like stock market investing, the property markets go through cycles. Maintain a long-term outlook as it usually takes time, patience and energy to reap the benefits from this investment class.
“Investment is most intelligent when it is most businesslike,” according to Benjamin Graham. Do your homework. Every investment comes with a degree of risk and real estate is no different. Of course you can never cover all the unknowns and you cannot accurately predict what the property will be worth in five years, but you can certainly get some sense of its prospects.
We have all heard the old adage: “location, location, location.” The value of property and the success or failure of this investment is largely dependent upon its location. Neighbourhoods change; market conditions, community issues, the local economic and political environment, poor enforcement of regulatory policies – these can all affect an area adversely and diminish property values considerably.
Unfortunately, the property market, as other financial markets, can be fraught with some unsavoury characters so be very careful with whom you are dealing. Choose your agent carefully; a tested, dependable, and responsive professional who comes recommended, has sound market knowledge. Be cautious of high-pressure sales pitches; they can be very persuasive yet a “once in a lifetime opportunity you cannot afford to miss” can turn out to be the worst investment you ever made.
The right tenant can be a joy, but the wrong tenant can make a landlord’s life a misery. Request for references and always follow up on them.
As performance in one asset class will help offset any downturn in another as economic and market conditions change over time, it is advisable to spread your risk amongst a range of assets including stocks, bonds and cash rather than concentrating on the property market.
Real estate has long been regarded as a sound and tested investmentclass that has proven its worth over centuries to be a stable and profitable investment, a trend that long-term investors are likely to continue to enjoy.