Much has been talked about how crucial the due diligence period is to acquire a profitable real estate investment, but only little has been said about the period before an investment decision.
It may be because many are not aware of this phase in real estate investing or, they probably think it doesn’t matter much. Whichever the case, the fact is that the investment decision phase is just as important as the due diligence phase.
What is the investment decision phase?
The investment decision phase is the period before you choose the particular real estate investment to engage in. It is that time when you ask questions such as:
Should I invest in this property or that? Will this property deliver my desired return on investment (ROI) or not?
Hence, formally, we define the investment decision phase as the opportunity for an investor to select a preferred real estate investment based on several economic factors before investing.
Now, those economic factors are the Key Determinants of Real Estate Investment. They are the benchmarks you need to make good investment decisions so that you can have the profit you desire.
To understand this thoroughly, let’s remind ourselves what real estate investments are.
What are Real Estate Investments?
Real estate investments are real estate assets acquired for the sole aim of income generation which may be either in the short term or long term. With these assets, you may generate income in the form of rent, interest, dividends or other types of profits.
For instance, when you purchase a piece of land and keep it until its value increases to resell, that is a real estate investment. Also, when you acquire a building and give it out for rent, that is another example of real estate investing.
But it is important to note that not every real estate asset you own is classified as a real estate investment. Therefore, if you have land or a building you don’t intend to get profit from, that is your tangible asset, not a real estate investment.
Classifications of Real Estate Investment
There are two ways to invest in real estate. You can either invest directly or indirectly.
- Direct Real Estate Investment
To invest directly is to purchase an actual property (land or building) to obtain profit from it.
You may decide to sell it after transforming or making improvements on it, rent it out, or you may hold it for a long time until its value increases before you sell it off.
- Indirect Real Estate Investment
Indirect real estate investment is an alternative way to invest in real estate. Those who invest indirectly are interested in benefiting from the relatively low-risk level investment but cannot be bothered about the details of property management.
To engage in indirect real estate investment, you can buy shares from businesses operating in the property sector or participate in funding schemes for property development. The income you get from this type of investment is usually interest or dividends.
Irrespective of whether you want to invest directly or indirectly, there are primary factors (Key determinants) that should guide your choice in the investment decision phase.
Key Determinants of Real Estate Investment
The primary factors that should influence your investment decisions are:
- The purchase price of the real estate investment
When buying an investment property or investing indirectly, the purchase price is one feature that would help you keep things in perspective.
First, you will be able to determine if you are financially ready for such a real estate investment. Next, you will be able to evaluate if getting extra funding is the right call to make.
The purchase price may sometimes include additional expenses or charges. Additional expenses may be taxes, insurance fees and mortgages in some cases, even maintenance and repair costs for upgraded properties.
Calculating the total expenses before making a decision will help decide if that particular real estate investment is profitable and beneficial to you.
- Increase in the market value of the property
For direct real estate investment, where an actual property is the subject of the investment, the benefits and features of the property should matter. Why?
This is because the real estate market is just as competitive as any other market where demand and supply rule.
So if you are looking to make a profitable investment, you should appraise the investment property to determine the market value before acquiring it. The same should apply when you invest indirectly. When you invest in property projects, shares and bonds, go for those with a good market value that promises a potential increase.
- The ratio between your credit and investment value
Do you need extra funding?
This determining factor should be a primary consideration for you. It is essential to determine if you would be making a loss or a profit after you must have paid off the loan obtained to acquire the real estate investment.
To do this, you need to consider all potential outcomes, risks and returns from the investment. This is to determine if the investment would generate the expected future cash flow to offset the credit obtained, interest accrued and offer a generous profit in the end.
- Real estate investment Levies
Another economic factor to consider is the real estate investment levies. Real estate levies are additional charges tied to real estate investments in general. The land use charge and property taxes, for example.
It is crucial to have a comprehensive knowledge of these levies to make good investment decisions.
- Desired Return on Investment
The profitability of real estate investment is determined by the returns you can have from such investment. If you would earn a lot from an investment, you’d say that the investment has a high ROI, and if you wouldn’t get a lot, you’d say that the investment has a low ROI.
So, it is safe to say that ROI (Return on Investment) is an indicator used to compare before investing.
Establishing your desired ROI will help you do two things. First, you will be able to eliminate unlikely options that would not generate your expected profits. Second, it would ensure your focus on acquiring only the real estate investments that would deliver your desired ROI.
A good beginning makes a good ending.
Now, you have realized how crucial the investment decision stage is to acquire a profitable real estate investment. It is time to use the key determinants listed above to choose several real estate investments that would deliver your expected ROI. Ready to get started?
James Cubitt Developments (JCD) develops a mix of projects that has high investment returns you can choose from.
For more information, contact us.
Phone number: +234 715 9995, +234 715 9996