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Updated by Claudia Fennel on Aug 03, 2017
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Most Important Factors for Investing in Real Estate – Look at the Pros and Cons

Investing in real estate is a gamble; a risk-reward system that should for best benefit have low liquidity. This analysed with other factors as listed below will prove to be a successful investment.


Location, Location, Location

The golden factor of any real estate investment is the location of the property. This age old punch line will always rule and remain as an important factor in the property market. Location specifics are defined by looking at the properties proximity to essential amenities, areas that conform to peaceful living, conductive neighbourhoods and as offered by Capitol TwinPeaks; scenic views. The properties proximity to schools, markets, banks, public transport etc. also defines the commercial value of the place.


Valuation of the Property

It is important to have a proper valuation of the property for simple reasons such as financing during the purchase of real estate, investment analysis, listing the property's value, taxation and insurance premiums. Some of the common methodologies that are used in the valuation procedure of a property include the sales comparison approach, cost approach and income approach. The latter based on the expected cash flow is ideal for evaluating the value of rentals. It is some of these factors that define the price of some of the best-located luxury apartments for sale in Colombo.


Investment Purpose as well as Investment Horizon

This is an important factor since real estate includes low liquidity and a greater investment margin. Lacking precision on your investment purpose could invariably lead to financial distress such as sudden loss. This risk is very high in instances the property is mortgaged. As such these are some of the factors to consider; whether the property falls under the category of 'buy and self-use' which includes savings on rentals and self-utilisation as well as value appreciation. If it is 'buy and lease' you are looking at a regular income and value appreciation over time.


Consider Expected Cash Flows and Profit Opportunities

Cash flow opportunities in real estate are linked to the investment purpose as well as usage. In this regard you should look at the expected cash flow from rentals, remember inflation profits the landlord; also consider the expected increase of the basic value due to long term appreciation on price. On the flip side, you should consider the benefits of depreciation as a tax concession. Cost benefits would be centred on mortgage loan values versus property appreciation values. And finally look at the cost benefit against renovation costs and the final sale price.


Know the Pitfalls of Long Term Loans

Loans are the most convenient aspect of acquiring property but how beneficial is a long term loan? Look at how long you need to commit your future income for repayment purposes. To better understand the pros and cons of long term loans it is wise to analyse and understand the full nature of long term loans and its subsequent impact on your future income. Ignoring the potential risk will eventually lead to major losses, hence look at mortgage types that best suit your repayment plans; should it be a fixed interest rate, floating rates or 0% interest down payment plans.