While planning to buy a residential property, there are certain considerations that can help you make the best choice. The most common idea is that real estate is all about location. However real estate is not one dimensional. It has so many aspects to it apart from location.
These following four factors can help you evaluate an investment: Location, Financials, Repairs, and Current Market.
Location:
Location is one of the most important things to consider when evaluating a potential investment in a residential property. Flats in Gomti Nagar Extension Lucknow were sold very easily because of their location. Since one is going to be a part of the neighborhood for a long time, it is necessary to study the neighborhood and decide on it. Always survey the neighborhood before you commit to it. Some important facts to consider while choosing a location include: whether the area is suburban or urban, proximity of retail shops, transportation hubs, hospitals, and schools, demand and supply of tenants, walk ability, safety and security, access to public transportation, population growth in the region, prospects for future employment and economic growth in the region etc. If your property is not in a location that allows you to have a healthy work life balance, select one where minimum number of family members have to travel long distances.
Financials:
Firstly, know your budget. How much can you put into this investment? How much can you afford to lose? If you need additional funds, where will you get them from? What will your monthly EMI and interest rate be? Secondly, look at the value of the property. Price is what you pay. Value is what you get. After analyzing your expectation of values from the residential property, hunt for properties that are least priced. Understanding the net present value, internal rate of return and cap rates, will allow you to evaluate potential investments' performance.
NPV:
The NPV formula helps you to get an accurate estimate of the value of your investment opportunity by subtracting the present value of the money invested from the present value of cash inflows, taking into account that the depreciation of value of money over time. This helps to estimate the current value of the money one can expect to earn over a specified period of time and whether the value of these future earnings will exceed the current value of money invested.
Internal Rate of Return (IRR):
The internal rate of return is the discount rate, or interest rate, used to produce an NPV that equals zero. A higher IRR is better. But like NPV, the IRR calculation is dependent on the timing of cash flows throughout the time period when you are holding the investment property.
Cap Rates:
Cap rate or capitalization rate, is a measure of the rate of return on your investment based on the annual net operating income (NOI) for your property. The cap rate is calculated by dividing the property’s annual NOI by its cost or current value. This gives a quick and simple understanding of potential returns. If the market’s Cap Rate is not known, then one should consult with a local real estate broker. Once the Cap Rate is determined, divide the NOI by the Cap Rate in order to get the current value of the property.
Comparative Market Analysis (CMA):
After doing the above financial analysis, it may be useful to do a comparative market analysis. This will give an idea of the comparable properties available in the area for sale. This will ensure that you are not over-paying for the property.
Repairs:
Before investing in a property, evaluate what repairs are necessary and what will be the expenditure on maintenance. Does the property need just a coat of paint and new carpet or does it need extensive work including new plumbing, electric, floors, walls, etc. Secondly, analyze how much you can afford to pay for these repairs. Your construction budget for materials and craftsmanship will also vary widely depending on whether you are renovating a property having high valuation or it is simply a flat for rentals. Generally, repairs cost more than you have planned for. If you hire a contractor, a two-week job often turns into four weeks. There could also be unexpected expenses. You may also end up paying higher property taxes, and insurance on the vacant property while these additional repairs are completed.
Current Market:
While making an investment, you need to look at what is trending in the real estate market now and adjust your plan accordingly. Another thing to look at when buying a property is its resale value. Highly desirable assets are those that can be easily bought and sold regardless of the market. They are always in demand and must be considered while making a purchase. One must also look into the reputation of the builder and make an assessment of the quality of projects completed by the builder.
Look for builders who have been in business for years, have developed a good portfolio of real estate projects and are known for their integrity. Paying a higher premium for such properties can even turn beneficial as this will end up saving cost and pain in the future.
Before making an investment, evaluate your residential property using the parameters mentioned in this article.
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