We would like to think that we are logical beings when it comes to decision-making. Yet, of all these life decisions, choosing a real estate investment seems to be the most nerve-wracking. And rightly so!
Making a real estate investment is emotionally draining. Like many other decisions, people generally don’t just buy a property – they fall in love with it. Cupid’s investment arrow has a propensity to hit you off guard. You start behaving differently just by being in the place. You begin to imagine what the place could be rather than what it is. The decision is also psychologically draining – torn between wants and needs.
On top of the stress, buyers and sellers often worry about the likely fraudulent acts that can happen during real estate transactions. However, the process doesn’t have to be so daunting. Graana.com brings you a set of simple questions you can ask before making a real estate investment.
Kill your darlings
Before asking the right questions, it must be borne in mind that making a real estate investment is a challenging task with various risk factors. Oftentimes, one lets the heart dictate the mind. But the decision is made easier if one thinks of it like this – what advice would you give your friend? Are you selling mirrors to the blind or are you applying logic? Detach your heart from the investment and let your mind provide you with the check and balance.
So why exactly are you making that investment? Are you looking to construct a home? Are you in it for monetary gain? Are you eyeing a rental income? Or are you considering a commercial property? The purpose of your investment will open ways to the type of investment you will be looking at.
Once you have a sense of your budget, you can start looking at the options available in that budget. Just like other decisions in life, there will always be a tradeoff and an opportunity cost attached to it. Either you can have that big plot where you can build that dream house in an undeveloped area, or you can have a smaller plot in the developed sector that is closer to the school or office. If you are lucky you can have both, but for most people budget is a deciding factor and dictates the options available. Yet, there are numerous options for small investments when it comes to real estate.
Delve deeper into your mind and understand how willing you are to take the risk? Are you prepared to jump and make that risky investment that will be higher risk but promises a higher return or are you content with a low-risk option with somewhat predictable profitability? As a rule of thumb, a person in their 60s would be more risk-averse compared to someone in their 30s who just started their career. Therefore, how much risk are you willing to take?
Again, a vivid idea of the purpose of the investment will help clear the air.
Do you want to buy a “possession” property where you can use the land immediately? Or a non-possession one? Will you be willing to buy a “file” knowing you will receive land sometime in the future but concrete details of the timeline are unknown? Or is it a commercial investment you are interested in? Which asset are you most comfortable with? These are some of the points to ponder over.
Is it short term or long term? Is it a 2-year plan, a 5-year plan or a 10-year plan? Simply, how long are you willing to wait till you receive gains from your investment? An investment horizon allows one to foresee the potential investment might possess in a given time frame.
How liquid do you want your investment to be? In other words, how quickly can that investment be turned into cash? The general rule is that the smaller the property, the more liquid it is – it is purely a case of demand-supply ratio. For example, given all variables constant, you might be able to sell a 5-marla property faster than a 10-marla property simply because the real estate market for the smaller property is more -more number of people have the purchasing power to buy it.
The old-age adage of “don’t put all your eggs in one basket” is relevant now more than ever. From a strict investment point of view, it is wise to have wide-ranging investments. That reduces the risk of losses incurred. In the case of real estate investment, it will draw the risk down if the investments are in different projects and areas, instead of being concentrated in one mega-project or one particular area. The approach for a rental income and commercial property will be different compared to purchasing land; however, the underlying principle will remain the same.
A Word of Caution
Even if you find a place you love and find a befitting rationale in favour of the investment, chances are you may not hit the bullseye. Every investment has a downside risk, but with a structured approach to decision making and by asking the right questions one can mitigate these risks and increase their chances of a successful investment. There’s a simple rule for that: ‘OADD’. O stands for ownership, A stands for approvals and D stands for demand and delivery. For a successful real estate investment, it is important to verify that the land is properly acquired and the legal documents are approved by the authorities. Moreover, it is essential to analyse whether the demand for the investment is horizontal or vertical and if the delivery is smooth with the authority having an outstanding reputation. If these elements are catered for, chances are the investment will be a profitable one!