The most important factor of production in the real estates market
Answers
Answer: it is labour
1. Location of the Property
Why is it important? The adage "location, location, location" is still king and continues to be the most important factor for profitability in real estate investing. Proximity to amenities, green space, scenic views, and the neighborhood's status factor prominently into residential property valuations. Closeness to markets, warehouses, transport hubs, freeways, and tax-exempt areas play an important role in commercial property valuations.
What to look for? A mid-to-long-term view regarding how the area is expected to evolve over the investment period. Today’s peaceful open land at the back of a residential building could someday become a noisy manufacturing facility, diminishing its value. Thoroughly review the ownership and intended usage of the immediate areas where you plan to invest.
2. Valuation of the Property
Why is it important? Real estate financing during purchase, listing price during the sale, investment analysis, insurance premium, and taxation—they all depend on real estate valuation.
What to look for? Commonly used valuation methods include:
Sales comparison approach: Recent comparable sales of properties with similar characteristics—most common and suitable for both new and old properties.
Cost Approach: Cost of the land and construction, minus depreciation—suitable for new construction.
Income approach: Based on expected cash inflows—suitable for rentals.
3. Investment Purpose and Investment Horizon
Why is it important? Given the low liquidity and high-value investment in real estate, a lack of clarity on purpose may lead to unexpected results, including financial distress—especially if the investment is mortgaged.
What to look for? Identify which of the following broad categories suits your purpose, and then plan accordingly:
Buy & Self-Use: Savings on rentals, benefit of self-utilization, and value appreciation.
Buy & Lease: Regular income and long-term value appreciation. Must develop the temperament to be a landlord (or hire a property manager) to handle possible disputes and legal issues, manage tenants, repair work, etc.
Buy & Sell (Short-term): Quick, small to medium profit—usually buy property under construction before selling at a profit on completion.
Buy & Sell (Long-term): Large intrinsic value appreciation over a long period. A means to work toward long-term goals such as retirement, college tuition, or other significant expenses.
4. Expected Cash Flows and Profit Opportunities
Why is it important? Cash flow refers to how much money is left after expenses. Positive cash flow is key to a good rate of return on an investment property.
What to look for? Develop projections for the following modes of profit and expenses:
Expected cash flow from rental income—inflation favors landlords for rental income.
Expected increase in intrinsic value due to long-term price appreciation.
Benefits of depreciation (and available tax benefits).
Cost-benefit analysis of renovation before sale to get better price.
Cost-benefit analysis of mortgaged loans vs. value appreciation.
5. Be Careful with Leverage, and Know the Pitfalls
Why is it important? Loans are convenient, but they may come at a big cost. You commit your future income to get utility today at the cost of interest spread across many years. Be sure you understand how to handle loans of this nature so you can benefit from it to the maximum—and avoid major pitfalls.
What to look for? Depending upon your current and expected future earnings and paying capability, consider the following:
Decide on the type of mortgage that best fits your situation (fixed rate, adjustable floating rate, interest only, zero down payment, etc.).
Be aware of the terms, conditions, and other charges levied by the mortgage lender.
Hunt around and bargain for a better deal to find lower interest rates and better terms.
6. New Construction vs. Existing Property
Why is it important? New construction usually offers attractive pricing, the option to customize, and modern amenities. Risks include delays, increased costs, and the unknowns of a newly developed neighborhood.
Existing properties offer convenience, faster access, established improvements (utilities, landscaping, etc.) and, in many cases, lower costs.
What to look for:
Review past projects and research the construction company's reputation for new investments.
Review property deeds, recent surveys, and appraisal reports for existing properties.
Consider monthly maintenance costs, outstanding dues, and taxes. Costs such as these can severely impact your cash flow
When investing in leased property, find out if the property is rent controlled, rent stabilized, or free market. Is the lease about to expire? Are renewal options favorable to the tenant? Are furnishings the property of the tenant or owner?
Quality-check items (furniture, fixtures, and equipment) if these are to be included in the sale