Turning a prime location into real estate profits
Studies have shown that real estate is one of the most reliable types of investment, offering a good return over time whether the economy is weak or strong. Property prices might go down in an economic crisis, but they tend to recover quickly. And it’s less complicated than buying stocks. As the old saying goes, a good real estate investment requires just three things: location, location, location.
That’s hardly a joke. Location is the most important factor because the supply of good sites is limited. As a consequence, the value of land in desirable areas tends to rise faster than inflation. And prices for prime sites tend not to fall drastically in an economic crisis. This helps ensure that long-term returns will be good.
If you own a valuable piece of land or would like to purchase one, keep in mind the following tips to ensure profits:
1. Don’t be overconfident: Having the right location doesn’t guarantee a profit. You also need to keep in mind the needs and preferences of customers. Perhaps prospective clients at your location prefer to live in rental houses. Then it doesn’t make sense to aim for a high return by launching a condominium project with many units for sale. Market demand is crucial to the success of a property investment.
2. Interest payments are a cost. You’ll probably need a loan to purchase land in a prime location. So the interest you’ll pay to the bank needs to be taken into account. This cost will weigh against your income from sales or leasing.
3. Don’t forget to refinance. Perhaps after you’ve paid instalments to the bank for a few years, interest rates are set to change. That’s when you should shop for a loan refinancing deal from another bank. This will let you pay lower interest, under a new loan agreement. Lower interest will mean lower costs and higher cash flow. But refinancing costs need to be studied carefully to ensure that getting a new loan is truly cost-effective.
4. Cash flow is crucial. Some people become spendthrifts when they have cash flow from collecting rents. But it’s important to save some of your rental income in case any tenants cancel their leases unexpectedly. You want to have money on hand to make timely payments on the interest and principal due on your loan. The need to properly service any loan without delay or interruption means that cash flow is extremely important in real estate investment.
5. Beware of taxes. Of course, the loan interest payment is tax deductible if you simply own a property. But if you have owned the property for less than one year or purchased it to sell or rent out, a business tax payment will be required. For this reason, it’s important to study tax obligations in advance of any property investment.
In short, although having the right location is an advantage, you might earn less profit or even lose money if you invest without a full understanding.