The Most Important Factors for Real Estate Investing (2024)

What's the most important thing to look for in real estate? While location is always a key consideration, there are numerous other factors that help determine if an investment is right for you. Here's a look at some of the most important things to consider if you plan to invest in the real estate market.

The Most Important Factors for Real Estate Investing (1)

1. Property Location

Why It's Important

The adage "location, location, location" is still king and continues to be the most important factor for profitability in real estate investing.Proximity to amenities, green space, scenic views, and the neighborhood's status factor prominently into residential property valuations. Closeness to markets, warehouses, transport hubs, freeways, and tax-exempt areas play an important role in commercial property valuations.

What to Look For

A key when considering property location is the mid-to-long-term view regarding how the area is expected to evolve over the investment period. For example, today’s peaceful open land at the back of a residential building could someday become a noisy manufacturing facility, diminishing its value. Thoroughly review the ownership and intended usage of the immediate areas where you plan to invest.

One way to collect information about the prospects of the vicinity of the property you are considering is to contact the town hall or other public agencies in charge of zoning and urban planning. This will give you access to the long-term area planning and make a determination of how favorable or unfavorable to your own plan for the property.

2. Valuation of the Property

Why It's Important

Property valuation is important for financing during the purchase, listing price, investment analysis, insurance, and taxation—they all depend on real estate valuation.

What to Look For

Commonly used real estate valuation methods include:

  • Sales comparison approach: recent comparable sales of properties with similar characteristics—most common and suitable for both new and old properties
  • Cost approach: the cost of the land and construction, minus depreciation— suitable for new construction
  • Income approach: based on expected cash inflows—suitable for rentals

3. Investment Purpose and Investment Horizon

Why It's Important

Given the low liquidity and high-value investment in real estate, a lack of clarity on purpose may lead to unexpected results, including financial distress—especially if the investment is mortgaged.

What to Look For

Identifywhich ofthe following broad categories suits your purpose, and then plan accordingly:

  • Buy and self-use. Here you will save on rent and have the benefit of self-utilization, while also getting value appreciation.
  • Buy and lease. This offers regular income and long-term value appreciation. However, the temperament to be a landlord is needed to handle possible disputes and legal issues, manage tenants, repair work, etc.
  • Buy and sell (short-term). This is generally for quick, small to medium profit—the typical property is under construction and sold at a profit on completion.
  • Buy and sell (long-term). This is generally focused on large intrinsic value appreciation over a long period. This offers alternatives to compliment long-term goals, such as retirement.

4. Expected Cash Flows and Profit Opportunities

Why It's Important

Cash flow refers to how much money is left after expenses. Positive cash flow is key to a good rate of return on an investment property.

What to Look For

Develop projections for the following modes of profit and expenses:

  • Expected cash flow from rental income (inflation favors landlords for rental income)
  • Expected increase in intrinsic value due to long-term price appreciation.
  • Benefits of depreciation (and available tax benefits)
  • Cost-benefit analysis of renovation before sale to get a better price
  • Cost-benefit analysis of mortgaged loans vs. value appreciation

5. Be Careful with Leverage

Why It's Important

Loans are convenient, but they may come at a big cost. You commit your future income to get utility today at the cost of interest spread across many years. Be sure you understand how to handle loans of this nature and avoid high levels of debt or what they call over-leverage. Even experts in real estate are challenged by over-leverage in times of adverse market conditions and the liquidity shortages with high debt obligations can break real estate projects.

What to Look For

Depending upon your current and expected future earnings, consider the following:

  • Decide on the type of mortgage that best fits your situation—fixed-rate, adjustable-rate mortgage (ARM), interest-only, zero down payment, etc. Note that each type of mortgage has its own risk profile and you need to study each carefully. For instance, ARM includes mortgage rates that can change at any time driven by capital market forces and the borrower must accept any rate changes during the loan term.
  • Be aware of the terms, conditions, and other charges levied by the mortgage lender.
  • Shop around to find lower interest rates and better terms.

6. New Construction vs. Existing Property

Why It's Important

New construction usually offers attractive pricing, the option to customize, and modern amenities. Risks include delays, increased costs, and the unknowns of a newly-developed neighborhood.

Existing properties offer convenience, faster access, established improvements (utilities, landscaping, etc.), and in many cases, lower costs.

What to Look For

Here are some key things to look for when deciding between a new construction or an existing property:

  • Review past projects and research the construction company's reputation for new investments.
  • Review property deeds, recent surveys, and appraisal reports for existing properties.
  • Consider monthly maintenance costs, outstanding dues, and taxes. Costs such as these can severely impact your cash flow.
  • When investing in leased property, find out if the property is rent-controlled, rent-stabilized, or free market. Is the lease about to expire? Are renewal options favorable to the tenant? Who owns the furnishings?
  • Quality-check items (furniture, fixtures, and equipment) if these are to be included in the sale.

7. Indirect Investments in Real Estate

Why It's Important

Managing physical properties over a long-term horizon is not for everyone. Alternatives exist that allow you to invest in the real estate sector indirectly.

What to Look For

Consider other ways to invest in real estate:

  • Real estate investment trusts (REITs)
  • Real estate company stocks
  • Real estate sector-focused mutual funds and ETFs
  • Mortgage bonds
  • Mortgage-backed securities (MBS)

8. Your Credit Score

Why It's Important

Your credit score affects your ability to qualify for a mortgage, and it impacts the terms your lender offers. If you have a higher credit score, you may get better terms—which can add up to substantial savings over time.

Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).

What to Look For

Scores greater than 800 are considered excellent and will help you qualify for the best mortgage. If necessary, work on improving your credit score:

  • Pay bills on time—set up automatic payments or reminders
  • Pay down debt
  • Aim for no more than 30% credit utilization
  • Don't close unused credit cards—as long as you're not paying annual fees
  • Limit requests for new credit and "hard" inquiries
  • Review your credit report and dispute inaccuracies

9. Overall Real Estate Market

Why It's Important

As with other types of investments, it's good to buy low and sell high. Real estate markets fluctuate, and it pays to be aware of trends. It's also important to pay attention to mortgage rates so you can lower your financing costs, if possible.

What to Look For

Stay up-to-date with trends and statistics for:

  • Home prices and home sales (overall and in your desired market)
  • New construction
  • Property inventory
  • Mortgage rates
  • Flipping activity
  • Foreclosures

The Bottom Line

Real estate can help diversify your portfolio. In general, real estate has a low correlation with other major asset classes—so when stocks are down, real estate is often up. A real estate investment can also provide steady cash flow, substantial appreciation, tax advantages, and competitive risk-adjusted returns, making it a sound investment.

Of course, just like any investment, it's important to consider certain factors, like the ones listed here, before you invest in real estate—whether you opt for physical property, REITs, or something else.

The Most Important Factors for Real Estate Investing (2024)

FAQs

What is the most important factor in real estate? ›

Property Location

The adage "location, location, location" is still king and continues to be the most important factor for profitability in real estate investing.

What is the 4 3 2 1 rule in real estate? ›

Analyzing the 4-3-2-1 Rule in Real Estate

This rule outlines the ideal financial outcomes for a rental property. It suggests that for every rental property, investors should aim for a minimum of 4 properties to achieve financial stability, 3 of those properties should be debt-free, generating consistent income.

What is the key to real estate investing? ›

Understand The Market

One of the best ways to avoid problems when investing in real estate is to understand the market. Understanding your real estate market will help you to evaluate the price of an investment property.

What are the three most important things to you in real estate? ›

I believe the three most important things when it comes to real estate are "location, timing, and circumstances," and here's why.

What is the 80% rule in real estate? ›

When it comes to insuring your home, the 80% rule is an important guideline to keep in mind. This rule suggests you should insure your home for at least 80% of its total replacement cost to avoid penalties for being underinsured.

What is the 50% rule in real estate? ›

The 50% rule is a guideline used by real estate investors to estimate the profitability of a given rental unit. As the name suggests, the rule involves subtracting 50 percent of a property's monthly rental income when calculating its potential profits.

What is the 7 rule in real estate? ›

In fact, in marketing, there is a rule that people need to hear your message 7 times before they start to see you as a service provider. Therefore, if you have only had a few conversations with the person that listed with someone else, then chances are, they don't even know you are in real estate.

What is the golden rule of real estate investing? ›

It was during this period that Corcoran developed what she calls her "golden rule" of real estate investing. This rule calls for investors to put 20% down on properties and then get tenants whose rent payments cover the mortgage.

How to learn everything about real estate investing? ›

Taking a course.

Universities and real estate trade groups (the National Apartment Association, the Institute of Real Estate Management and the Building Owners and Managers Association, for example) are some of the best resources for grasping the fundamentals in this field.

What are the 3 A's of investing? ›

Remember the 3 A's for retirement saving: amount, account, and asset mix.

What is the single most important factor in determining demand in the real estate market? ›

The primary factor influencing demand for housing is the price of housing. By the law of demand, as price decreases, the quantity of housing demanded increases. The demand for housing also depends on the wealth of households, their current income, and interest rates.

When purchasing real property, what is usually the most important requirement? ›

The first requirement to buy a home is a down payment. This is the money you pay upfront to offset the amount you need to borrow.

What is the factor in real estate? ›

Main definition. Core Factor. The percentage of common areas in a building (rest rooms, hallways) that, when added to the net usable square footage equals the net rentable square footage. May be computed for a building or floor of a building.

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