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Wednesday, 18 December 2013 14:07

Real Estate Investments: Areas to scrutinise before you invest.

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Real-Estate-riskReal-Estate-riskReal Estate Investments may be seen as an area to avoid for some people whereas for others it may be seen as piece of cake.  In either case, it is a lucrative investment tool but you need to be wise to operate it.

This first article will form a set of articles about areas to scrutinise before you invest.  It will include

  • the main drivers for investment,
  • lending institutions pros and cons,
  • market assessment analysis,
  • real estate statistics to follows,
  • due diligence and risks analysis,
  • real estate performance metrics and
  • exit strategies.

The definition of any Investment involves commitment of capital now in exchange for benefits to be received in the future in the form of capital and/or income. Two essential components that form the basis of any investment are anticipated return and risk, and the investor is a determining factor of how much risk and return he is willing to take.

When I receive sale calls from international property agents, most of the time I remain surprised that even big label real estate agencies do not know the basics of what actually is a real estate investment. After a well memorised sales pitch I am always asked if I have any questions - that is when I get all the information I need. And so should you.

Agents will furnish you with a well-designed brochure full of tropical paradise images, double digits of ROI and friendly support to look after your investment. Please do not forget that you are buying a real estate, a lifetime asset, not exclusivity aura created by wonderful brochure and sweet talks. The main thing I want to assert here: do not forget that you are in control and you have bargaining power as well as capital to invest.

Main drivers and caveats for investment in real estate.

Personal financial goals.

investmentinvestmentA real estate investment is not a get rich quick scheme and targets for returns must be clearly established. It is a tangible tool to protect investor’s capital against inflation, generate two fold income and create a living space for human beings. Gintas will work with you (the investor) to identify your financial goals, assist your real estate assets to reach these goals as well as monitor and control performance of the assets over a holding period.

The main incentives to invest in real estate are income return and capital growth over holding asset period.

Capital growth is the difference between the capital value of an asset at the beginning of the investment period, and the capital value at the point after the investment period has begun.

Rental Income Returnis the main driver of real estate performance and also underpins its defensive capacity.

In today’s economy many developers and agents will sugar coat their properties just to boost their stagnant sales. As an investor you should seek a residual value in each property you plan to invest.  That is important for every real estate investment no matter how big or small it is.

In any common brokerage you can find that properties are 20-30% below the market value, so be careful, do not get caught by this trick. First ask for a proven valuation not older than 2 years, and compare it to valuation done on economic peak time. The difference may be obvious.  That’s not the case as valuations are a computation and expression of individual opinions on the property.  In a buoyant market it is much easier to compare valuations from the sales volume records of the similar area, but in a stagnant market, valuations are done on a fair judgement basis which may not reflect property value and worth. Ask the agent or property valuer what made him come up with this figure, what local area economical indexes he used for computation, elemental survey of the property (even for a new build). Investor must be crystal clear about the value, worth and price of the investment before it becomes a burden.

Before you pay any amount of deposit be persistent to receive an Irrevocable Sales Agreement and submit that to your solicitor for review. This will outline sellers and buyers obligations, property investment essence and legal grounds in place for failure. Most agents will force you to pay a deposit first, just to bring you in the game before they release the Irrevocable Sales Contract so by aware of this.

What most investors fail to do with a contract is to compare the returns and property features outlined in the sales contract with returns and features outlined in the brochure and agents website. If you discern no difference between the figures and features, they add up well and the contract is to build with reasonable grounds.  I believe the answer is obvious, if any discrepancies with land tenure and rental guarantee the program agents are liable for misrepresentation  You should be cautious about this.

Pay attention to figures and numbers.  They will bombard you to make you sure you are making a right decision without even looking at the backside of it. First thing is to look at rental guaranteed program and get the details how it will be guaranteed. Is it an asset, bond, financial instrument, or strong covenant backed up?

If they furnish you with statistics of the area, comparison with other properties and tourism numbers, that does not guarantee any income stability for your asset as demographics change as the need for property also (especially if you buying off plan). In cases where rent periods are reasonably guaranteed by the contract, investors should feel well as in case of failure the developer will restore your agreed asset income.

This is vital to understand when making a first investment, that without rental income a property becomes a burden and no 6-12% ROI as promised is generated per annum.

This concise article focuses more on caveats to look at before stepping on the property ladder. Attractiveness of any investment is directly related to your financial education, so maintain your composure, seek advice and do your scrutiny.

Read 14929 times Last modified on Friday, 03 January 2014 12:45
Gintautas Matukaitis

Gintas is a real estate professional with strong planning, analytical and financial management skills primarily related to commercial real estate, development and property management sectors.

He has hands on experience with project planning, investment analysis and decision making techniques with a strong focus on achieving accuracy and efficiency in any projects that he works on.  

He also has experience as an estimator and quantity surveyor.

Gintas is in the final stage of a Masters Degree in Property Management and Investment from Napier University in Edinburgh.

You can contact him on gintas2511@gmail.com

His LinkedIn profile is here

 

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