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Real estate has always been a great investment opportunity for those wanting to diversify their portfolio and build wealth over a prolonged period.

However, investing in the right real estate isn’t always as easy as finding the cheapest property. There are a number of factors you need to consider when purchasing an investment property, and these tips can help point you in the right direction.

Area Regeneration

Has the area or location you’re considering experienced regenerations? Is it an up-and-coming area, or is it earmarked for development? The prospects of the area and what the future holds can be a great indicator of whether or not this can be a good investment. If you’re looking for short-term gains, you might find that purchasing property in an area that is scheduled to be developed can give you a more significant return in a shorter space of time as the area becomes popular, for example. 

Price to Rent Ratio

The price-to-rent ratio is the cost of the property purchased and its rental income.

For instance, let’s say a property costs $300,000 to purchase and could be rented for $2,000 per month, giving you $24,000 annually. You then divide the $300,000 by the $24,000 to provide you with 12.5. This is the price-to-rent ratio, a key metric in real estate investment.

A good ratio is below 15, indicating a potentially high return on investment. A ratio of 16 to 20 is considered a moderate investment opportunity, offering a balance between risk and return. A ratio over 21 suggests the property may be overpriced, potentially leading to lower returns. While this is not a strict guide, it can help you make your decision based on a range of factors, such as the neighborhood’s trend or the current market conditions.

Talk to Real Estate Agents

Real estate agents in the local area can be a wealth of knowledge and help you understand investment opportunities in the area and what would be a good option for you. This is especially important if you’re looking for luxury real estate investments, as they can help you source and identify what a worthwhile investment is so you can avoid making an expensive mistake. 

Capitalization Rate

This refers to the property’s net operating income and can give you an idea of the ROI you might expect prior to purchasing.

To calculate this, you need the NOI or net operating income, which is the annual rental income minus all of the expenses such as mortgage repayments, taxes, etc. You then divide this figure by the purchase cost and multiply by 100, e.g. ($50,000 / $500,000) x100 =10%.

• 4-5% lower risk and lower returns often associated with high-demand urban areas.
• 6-8% balanced risk and returns
• 9% and above more significant potential and greater risk

Multiple factors can influence the capitalization rate, such as rent growth, location, and economic indicators like job growth, population trends, and local development projects. It’s important to take all of this into consideration when assessing a property’s investment potential.