If you are interested in investing in housing, in this post you’ll get to know the main keys so that you have the necessary bases to identify and carry out a magnificent investment.
You do not need experience, in fact, everyone who has invested in property has had to start with the first one. With the help of our SPV mortgages guide, anyone may make their very first investment in rental property.
Introduction
There are many places to invest your money besides under your pillow or in a bank account: businesses, stocks, bonds, time deposits, investment funds, currencies, raw materials and also in real estate, among others.
When investing we choose not to buy the goods and services that the money we have could provide us or leave it in "cash", we risk that money when buying an asset with the aim of obtaining returns in the form of cash flows (income) or increase in value of the asset (capital gains).
Investment in real estate provides competitive returns with respect to the risk involved; Like all investments, they have strengths and weaknesses compared to others. One of the characteristics that make it challenging to make an investment in real estate is the amount of money that the investment requires.
Real estate can generate both capital gains and income, but when investing to obtain cash flows, always pay attention to the latter, which are predictable. Within real estate, there are many types of assets, all with characteristics that differentiate them from the others: premises, warehouses, offices, hotels, tourist apartments, storage rooms, etc.
If you have come to this post, it is because you are already convinced that investment in housing is attractive for you and you want to study how to conduct the analysis so that your investment turns out well.
Initial Yield or Initial Profitability
What is the yield or initial profitability?
- The yield or initial profitability is a relationship between the income that they give you and what you have paid for the asset. It is measured in percentage and the higher the investment, the more profitable it is (they give you more than you invested):
- Gross: Total annual income between property prices. There are different degrees of gross profitability. Sometimes they don't even include purchase costs
- Net: To compare the returns, the net should be used, because, in the end, the important thing is the money that enters your pocket after all expenses. And I have to compare it with the total investment made (purchase expenses are also part of my costs).
Do we only need to know how to calculate the initial profitability?
The Initial Yield does not represent the total return that an investment will bring us, only the relationship between initial income and necessary investment. The cash flows that we will receive may rise or fall in the future and the returns required by investors may also rise or fall (this will affect when we sell the asset). All this will affect the total return on investment.
If we do the inverse, the total cost divided by the annual benefits, we will obtain the number of years it will take to recover the investment (at constant benefits). With a yield of 5% we recover the investment with the initial income in 20 years, and with a yield of 10% in 10 years.
There are many investors, especially individuals who invest in housing, who only use this metric for their investments. The initial profitability gives you a good idea of whether an asset is expensive or cheap, although it may be, for example, that it is below the market and the tenant is going to leave in a short time. In that case, perhaps it is better to estimate how much it would be rented for later.
Where to Find Investment Homes
The best tool that we currently have to quickly find opportunities are real estate listing websites. They can also be found by word of mouth if you find out about someone who sells at a good price, although this usually happens more if you live on the same block.
Another way is to find an agency that is specifically good at an investment property and inform them of the type of product you are interested in.
Call the apartments advertised in the area/s you have selected and talk to the agency, ask them if there is a demand for tenants, how long it would take them to rent the apartment they are selling and at what price.
Do you know people who have rental apartments in the area? How are they doing? How long do they normally take to rent it? What is the rental price now? And the previous tenant?
You can do the same if you know tenants in those areas. Is it difficult for you to find apartments? Can you normally negotiate down the asking price for a flat? What contractual conditions do you currently have? Carry out a rental search and save as a favourite the apartment with the cheapest rent that is in good condition.
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