Property investment is an excellent way of escaping from the grinding nine-to-five world that so many people reluctantly find themselves in. The process of investing in a property and then making money off of it is both exciting and, when done right, can lead to considerable financial freedom. However, for all the success stories surrounding property investment, there are just as many stories of failure and heartbreak. While everybody who enters the world of property investing wants to succeed, only those who are prepared and ready to tackle the task at hand actually manage to achieve that success. To help maximize the chances of one’s property investing dreams coming true, take a look at these three keys to property investment success.
- Know capitalization rates
Capitalization rate ranges are absolutely fundamental in the world of property investing and they need to be mastered by anyone who has any hope of making a profit from his or her investments. A property’s capitalization rate range will help determine whether a particular investment is likely to lead to a profit. To determine a property’s capitalization rate, divide that property’s net income by its total value. Of course, that sort of equation sounds simple enough, but it requires quite a bit of research in order to get the most accurate result.
Data for determining capitalization rates should be gathered from similar properties in the same neighborhood or locality. Capitalization rates, after all, are very specific to geography and housing type. Also, instead of calculating only a potential investment’s ideal rates, be realistic: a luxury building in a major city center, for example, will have a vastly different market capitalization rate than an apartment building located in a mid-sized town.
- Have a game plan
Wanting to get rich, sadly, is not a strategy for property investment, although it can be a great motivating factor. Rather, what needs to be done very early on is to have an overall game plan in place. All of the best property investors have a knack for seeing both the big picture while also paying attention to the details. Write down what the main goals and expectations are, such as how much one expects to make in the first year. These overarching goals may be relatively broad, but don’t forget to write down specific guidelines as well. For example, be sure to look into every aspect of tenancy agreements if you will be letting a property for the first time.
Also, when looking for a property to invest in, be sure to deal with an agent that is trustworthy and has a strong record. Other important issues to keep in mind when developing an investment plan is determining how much can be invested in a property, what the budget for maintenance is, what the investment return is expected to be, and what the long-term exit strategy will be.
- Location and property types
As was touched upon in the first section on capitalization rates, geography will play a big factor in determining one’s investment decisions. Settling on a geographic area and range will largely depend on one’s financial resources and expertise in various property markets. Smaller investors will likely want to limit themselves to a specific locality, while larger investors may want to consider expanding their investment efforts nationally and perhaps even overseas. In both cases, knowing the reality of the market in each locality is key. Research in this area is fundamental, which may take the form of talking with experts, such as investment firms familiar with the locality, and unearthing data to give one a good idea of prices, buyers, tenants, and property types.
Don’t forget, also, to check with each local council to determine what laws and regulations may apply to property investment and letting in a particular area. Finally, where one chooses to invest will also likely determine the type of property one invests in. In some areas, for example, commercial property may be the key to financial success, while in other areas developing an exclusively residential portfolio may be more beneficial.
Taking the plunge into property investment can be a life-changing decision, but only if it is done right. Property investment can pay substantial dividends for those who are well prepared and know their market, but a desire to succeed needs to be combined with knowledge, research, and planning. As the above key strategies show, property investment is about so much more than just wanting to make lots of money fast. By paying careful attention to the three key strategies described above, people new to the property investment game will have a much better chance of coming out of it as financial winners.
Adam Taylor is part of a team that manages a property portfolio and he likes to take the time to share his insights on property investing with an online audience. Adam is a regular contributor for a variety of relevant property and lifestyle websites.