Investing in real estate, how do you do it? Why is it a valuable investment, what are the advantages and disadvantages, and what first steps are important before you actively enter the market? In this article, we share some must-knows. This is what you need to know about investing in real estate.
This is what you need to know about investing in real estate
Real estate investing is more than “house milking”: you can invest in real estate by buying a home and renting it out, but you can also buy a commercial or retail property, a garage box or a parking lot. Or how about a vacation home that you yourself can go to once in a while? There are many options within the world of real estate.
Advantages of investing in real estate
The advantages in investing in real estate right now are the net rental income, the double-sided value development (rental stream plus value accumulation of your property) and the relatively steady market. You don’t immediately notice the volatility in housing prices, for example.
Most important first step
The most important first step you should take before investing in real estate is to ask yourself why you want to invest in real estate. Do you want to invest in real estate to have an income in 20 or 30 years when you retire? Or do you already want to have an additional source of income in 5 years so that you can work less and generate income from real estate?Your goal with real estate investing determines the next steps. Real estate investing for retirement undoubtedly means you want to take less risk – and then investing in a home may be of interest – but if you want to accumulate passive income 5 years from now, then looking at commercial real estate with a bit more risk may be an option.
Key terms
Once you have determined your goal around real estate investing, it is important to gain knowledge. You don’t need expensive training for this, learning by doing (and networking!) will take you very far. In terms of knowledge, there are a few terms that are very widely used and useful to understand: BAR, NAR, Yield and Factor.
BAR stands for Gross Initial Return. In short, a BAR represents your return before all initial and annual costs are subtracted from your return. You can calculate this by dividing annual rent by purchase price. In addition to the BAR, there is also talk of the NAR. This is the return after deducting all annual maintenance costs and the initial cost. The costs you need to think about are VVE, taxes, reserve for maintenance and management fees.
Return is the profit on the investment you make, and the factor is a commonly used term in real estate land. The “factor” is short for a fancy word: capitalization factor. The factor can be calculated by dividing the purchase price by the annual rent. The factor says something about the value of the investment property and is used to determine the value of rental properties.
Final tip: mortgage broker
Before you start looking for a suitable property and before you make an offer, it is important to know how much you can finance an investment mortgage with. Therefore, it is smart to hire a good mortgage broker who knows all about investment mortgages. This is because an investment mortgage is different from a personal mortgage. Most advisors want to talk to you free of charge.
