As you know, real estate is one of the most profitable investments. However, this doesn’t mean that profits are always there. In practice, the profitability of a real estate investment depends on many factors.
Are you planning to buy a condo, a multiple apartment building or a house to rent or to sell? No matter your project, here are 5 features your property must have to ensure optimal profitability.
Great Location
Usually, the value of a property is closely related to its location. There for it is important for your property to be in a great location. There are 3 areas that you can look for:
- Downtown which often remains the location most sought after by tenants;
- Neighbourhoods close to the city centre if they are easily accessible;
- Residential areas that are sought after by families;
Depending on the chosen area, your investment should present relevant features: a small space will be rented quickly downtown (most notably to students or young professionals), while you need to prioritize properties that can welcome families in a residential area.
A Good Occupancy Rate
The occupancy rate depends directly on the supply and demand. It is one of the most relevant indicators to determine the eventual profitability of a real estate investment, most notably rentals.
This rate is high when demands exceeds supply. This is the most beneficial situation for investors because it helps in finding tenants quickly. The ideal situation is to invest where the occupancy rate is high.
Precise Profitability Calculation
Calculating the profitability before investing is the best way to decide if a real estate investment is profitable or not. This calculation can be made through several methods, most notably by considering the Gross Revenue Multiplier (GRM) or the Net Revenue Multiplier (NRM). It is more relevant to use the NRM which will be closer to reality and more precise.
To do so, you need to divide the purchase price of the apartment by the rent to which rental fees have been subtracted. This operation helps getting a ratio that will relate to the number of years it will take for the property to be profitable.
Generally, a good profitability ratio is between 10 and 16.
A well thought out mortgage
In practice, it is rare that you get a property with your own money or with your own personal assets. Most of the time, you will have to request a mortgage. The profitability of a real estate investment depends also on the mortgage.
Ideally, the cost of the payments must not exceed the total of rents. This is the most comfortable situation.
In most cases, your bank will proceed to a bank resistance test to assess your reimbursement abilities: you can anticipate it by getting more information on the method.
An interesting potential gain
Even though the bought property is for renting, the investing might not stop there. Investors might also think of selling it years later and gain more benefits afterwards.
To have major gains before even buying the property, investors must have bigger and a longer-term picture. If they expect to sell or resell the apartment, they most think about all the previous factors.
They must anticipate the total of necessary improvements before putting it on the market and the taxes related to the operation. The tax calculation is made based on half of the total gain.
Collaborating with me means choosing not to leave anything to chance, nor to market fluctuations!
Interested by the real estate market, learn what to look for before buying a condo.
