For many investors, real estate is a very attractive but unknown value. If you are planning to make a real estate investment there are some important points that you should consider.
Although it is widely accepted that a strong real estate investment has the potential to generate considerable profits, until recently, relatively few investors had the opportunity to gain first-hand experience with this asset class. And despite its many advantages, real estate is a complex type of investment. Although there is currently a wide availability of opportunities to invest in the real estate sector, it is important to know how to approach all types of real estate investment methods, both active and passive, from rental properties to crowd funding platforms.
But before making any investment in the real estate sector, it is necessary to ask yourself a series of questions and obtain their answers. In this article and based on our experience as a real estate agency located in Mallorca, we will try to clarify the critical points that you must be clear about before buying an apartment in Palma to rent or resell, or to make any other type of real estate investment.
Let’s start with questions that every potential real estate investor should think about, no matter what type of investment model they are considering.
Do you have the time and experience to invest actively, or would it make more sense for you to invest passively?
There are big differences between active and passive real estate investing, and most investors will have a clear inclination toward one over the other.
However, if you are just getting started with real estate in general, you may not be clear about this. Once you do, you’ll likely identify which option best fits your situation, or you may recognize that one model simply isn’t viable or economical for you.
For example, does the idea of owning real estate appeal to you? Well, lean towards active investments. On the other hand, if you do not have time to deal with properties and tenants, it is better to choose passive investments.
How can you finance your real estate operation?
Currently, every investment needs to have a certain initial liquidity and not depend on a loan with a very high percentage of the investment. Real estate assets generally require an investment that can make many first-time investors opt for other options.
To obtain the money necessary for your investment, the most normal thing to do will be to go to a bank to obtain a loan using the property as collateral.
In addition, investing in real estate usually presents additional expenses to simple purchase and sale transactions. It is often necessary to make some additional investment in the form of renovations or repairs. And those additional tasks cost money beyond your initial investment. Additionally, you must consider ongoing costs such as property taxes, home insurance, and mortgage insurance. When analyzing the cost of an investment, do not forget to take into account the secondary costs along with the main cost of the acquisition.
When will you start to have a return on investment?
Real estate investing is not like buying stocks or investing in typical investment funds. You will probably have to wait some time to see any return on investment.
For example, if you have bought a property to rent it out, you can start earning income as soon as you can rent your new property.
On the other hand, if you intend to sell the property you will surely have to wait a while for it to appreciate, unless you have gotten a real bargain and can sell it quickly. If you want to sell a house quickly, look at this post where we explain how to sell it in less than three months
On the other hand, if you are putting money into equity investments through a crowdfunding platform, it could take five or even ten years for your investment to pay off.
Although real estate assets are usually a safe and profitable investment, if you are trying to get rich quick, real estate investing may not be your best option.
How much time do you have available to dedicate to your new investment?
For many people, time is a scarce commodity and many real estate investments require a significant dedication of time if we want them to give us the expected return.
Some types of investments require a higher time commitment than others, but all real estate investments require a minimum time commitment to make them profitable. If your investment requires a landlord, can you dedicate the time necessary? If not, can you afford to hire a property manager?
Unlike other investments, which require attention only during business hours, real estate requires constant management as long as you own the investment.
Investing in real estate is not recommended for novice investors, nor to obtain a high return in a short time. Before taking the plunge, it’s a good idea to evaluate investment opportunities and take stock of your goals. That way you can find out where you can invest your money.
You could also consider consulting a financial advisor and/or a real estate advisor to help you make the decision and accompany you in all phases of the investment.