Real estate as an investment is more popular than ever, and for good reason. It withstands inflation, its value is not tied to stock market chaos, and most importantly, its value can never be zero, unlike stocks. However, not every property automatically qualifies as a good investment, and not every investment guarantees profitable returns. Therefore, let’s explore how to identify a good investment property and what you should pay attention to. Let’s start with a brief definition. An investment property is a property in the commercial or residential sector that is used as an investment to generate passive income.
Are investment properties secure investments?
No investment is 100% secure, including real estate. However, real estate is one of the safest investment forms the market has to offer. One of the reasons is that it is less affected by recessions. Its price is based on supply and demand, and the supply remains unaffected by economic downturns. Therefore, economic recessions mostly impact demand, but even if demand decreases, it remains high enough to slow down the price increase. This scenario is currently playing out during the COVID-19 crisis. There is no sign of property prices decreasing. On the other hand, the stock markets have been highly volatile since the crash in March 2020. Significant fluctuations are a daily occurrence. This is not the case in the real estate market, except for special circumstances like the real estate bubble in 2007/08 in America. Generally, property prices are much more stable and gradually increase. Unlike stocks, the value of a property can never be zero, as the intrinsic value is always retained.
Characteristics of a good investment property
Location, location, location
One of the most important and decisive factors for a successful investment property is its location. This applies to both macro and micro locations. The macro location refers to the overall region where the property is located. The higher the population density in a region, the greater the demand for rental properties. The micro location refers to the local surroundings. Are there essential facilities nearby? Is the property situated in an affluent or up-and-coming neighborhood? Are schools and kindergartens nearby? What is the access to public transportation? Which major employers are in the vicinity? Besides the current situation, the future development should also be considered, as it is a long-term investment A property that is currently offered at a low price but is located in a developing area or is close to planned infrastructure improvements can quickly increase in value. Conversely, an expensive property in a declining neighborhood may lose value. Therefore, it is essential to consider the overall picture.
Besides location, the condition of the property also plays a crucial role. If significant modernizations or renovations are required before the property can be rented out, the cost could quickly reach the mid-five-digit range. To avoid this scenario, you should invest in verified properties. Verified properties are the best guarantee for a sound real estate purchase, as future costs are nearly eliminated. At the same time, they offer valuable insights into their development potential. After all, a property can only provide a significant increase in value if it has substantial growth potential.
A comprehensive evaluation must include the expected return. While it is an essential indicator, it should not be the sole determining factor. Various formulas can be used to calculate the return. As a rough guideline, the net rental yield should be at least 3.5% for new properties and at least 6% of the purchase price for older properties.
Investment properties are an extremely secure form of investment if certain factors are considered. Apart from an excellent location, verified properties and an expected return are decisive. However, it is crucial to be aware that the property is only 50% of a successful investment. The other 50% is contributed by appropriate financing. Only through a suitable financial plan can a successful overall concept be achieved.