Making a safe bet

Increasing inflation is the first factor that inhibits the profitability of a real estate investment.

Increasing inflation is the first factor that inhibits the profitability of a real estate investment. While investing in any kind of property,one should always consider what the overall earnings would be worth at the point in time one wishes to liquefy them. If one fails to plan for the inflationary effect,further property purchases may be out of reach rendering the whole concept of real estate investment an exercise in futility.

A simple method of establishing whether inflation will erode ones real estate investment is to determine if the interest rate earned on ones savings is less than or equal to the rate of inflation. If it is,it means that your real estate investment too will suffer because of inflation. One needs to establish whether the average price for property rentals in the location one wishes to invest in will remain higher than the rate of inflation in the long term. If it does not,there is not much point in investing in that location.

DEALING WITH TAXES

Property taxes are another aspect that can negatively influence property investments. While buying with the intention of reselling it for a profit or renting it out,one should remember that profits arising from both the sale of a property and monthly rental income generated are taxable. The yardstick here is not how much one earns from ones property,but how much one manages to keep after the taxman has taken his cut.

It is very unwise to invest in a property without first consulting with ones chartered accountant or an experienced real estate professional. While there is no way of avoiding property taxes,it is certainly possible to make the taxation scenario more realistic. This calls for current knowledge of property taxation laws,which often change without warning. One needs to determine ones post-taxation cash flow in order to know just how valuable ones property investment will be in the long run.

FREE-FLOATING RISK

Finally,there is also always an aspect of free-floating risk attached to property investments. For instance,buying a property with the intention of selling it at a profit later always involves a degree of uncertainty and chance of loss. One can judge the current appreciation value of a certain location with a fair degree of accuracy,but there is no way of anticipating all developments as:

The location may fall out of favour with buyers

There may be unsuspected litigation attached to the property

Though superficially sound,the property may be legally untenable due to substandard construction or does not conform to required earthquake-resistance parameters

The government may decide to acquire the land the property stands on at the minimum rate for infrastructure development

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The investor may need to sell the property at a moments notice and at a loss to cover other urgent financial commitments

There may be a natural calamity such as a flood,rendering the entire location unmarketable

BEFORE YOU INVEST8230;

To minimise ones risk while investing in real estate,one needs to know:

Exactly how much profit will accrue from the property in a given time frame

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How much it will cost to make the property marketable

How long it will take for the property to attain its highest possible market value

What the state of the market is now,and what will it be in the near and distant future

What the possible losses could be with regard to all applicable variables