Here are 5 factors to consider before purchasing real estate as an investment

Sep 30, 2018 | 11 months ago | Read Time: 4 minutes | By iKnowledge Team

While investing in real estate can be extremely lucrative and profitable, ensuring high rates of return, for first time investors, there are a few roadblocks that must be avoided to ensure that your investment is safe and in line with your financial goals.

Factors To Consider Before Purchasing Real Estate As An Investment - Aegon Life

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If you are looking for advice about how to invest money, there is no shortage of opinions from the market gurus to your parents and from your running buddy to your company’s CEO. Everyone has their own methodology about investing and what is indeed the best way to invest your money. According to a survey conducted by the Associated Chambers of Commerce and Industry of India (ASSOCHAM), 65% of working individuals prefer real estate as a mode of long term investment[1]. While there is plenty of market research and investigation on whether or not investing in real estate is advisable, in reality, it is a decision that hinges on your own personal financial plan, goals, situation in life, the property itself amongst other factors. If you are considering investing your hard-earned savings into real estate, it is important to not make a hasty decision and take your time to consider all the below factors.

Outlining your overall financial plan

The first step while considering any long investment is to evaluate your overall financial plan for at least the next 5-10 years. Here you should take into consideration your day-to-day expenses, how much you expect them to grow in line with your income, and expenses such as children’s education, car loans, medical expenses, amongst others. Additionally, you should also consider if you expect any changes in your demography, including having a family, the expenses related to the same, parents’ retirement, paying for a sibling’s education or any other similar expenses. All these factors play a crucial role in your financial plan and affect your ability to invest. Investing in real estate makes you asset rich and if your financial plan demands liquidity or requires you to be cash rich, it might not be the best decision for you.

Income stability and your life situation

Secondly, you need to evaluate the stability of your financial situation. While doing well at work whether you are self-employed or working for another company can be very exciting and prompt you to seek investment into a property, it is often advisable to ensure that this income is steady and will remain steady for the foreseeable future. If you are unsure about the stability of your financial situation or anticipate having some big expenses in the recent future, it is not advisable to invest in property and have your savings strapped up. Similarly, another very important factor to take into account is your life situation. For instance, if you are married but planning to have kids sometime soon, it is advisable to invest your savings into an education or Unit Linked Insurance plan that offers you investment returns as well as protection. One such plan would be the iMaximise plan offered by Aegon Life, which offers a combination of both protection as well as market linked returns. If you anticipate having such big changes in your life plan, once again having money strapped up into a property would not be financially advisable. 

Income Stability - Aegon Life

Credit: Photo by Breno Assis on Unsplash

Property taxes and management

Once you have evaluated your financial situation and personal circumstances and decided to go ahead with your investment, look into the underlying costs of investing into the particular real estate commodity, including property tax, management costs as well as insurance charges. Even if you find the perfect house at a satisfactory price, if it is located in a city with very high taxes, it could be a poor investment option. If you are planning to rent out the property you are investing in, it could be a hassle to be a landlord. To avoid this, often people hire property management companies for maintenance and this could be another added expenditure eating into your rental amount.

The 1% rule

The 1% rule is of investing in property followed worldwide and states that a property should be capable of being rent out for at least 1% of its final purchase price every month. This is critical in being able to underscore which properties are capable of paying for themselves and helping you consolidate your investment.

Beware of “fixer upper” properties

Another trap to look out for when considering what property to invest in is the appeal of fixer upper properties. Often real estate agents will push off properties that are a hassle by stating they just need some “nips and tucks” to be up and running, but in reality, often one ends up paying much more to rehabilitate the property. It is more advisable to look for properties that merely need simple repairs even if they are not being offered at bargain rates, as this will help you save money in the long term.

II/Sep 2018/4423


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