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Real Estate Investment Decisions Essay

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Updated: Dec 13th, 2020

Introduction

Over the years, commercial real estate investment has developed into a fully-fledged industry that continues to attract more investors. This observable fact has been necessitated by the fact that buying and selling property has proven to work as a financial investment option through which people can supplement their income (Ling & Archer, 2017).

Besides, benefits such as appreciation of properties, a favorable reward profile, low liquidity, cash flow, and tax benefits have also played a pivotal role in the high rate of growth experienced in the industry since the turn of the century. However, experts argue that investing in commercial real estate has its risks that every investor has to put into consideration to make informed and intelligent decisions (Rodgers & McFarlin, 2016).

This mainly entails conducting a thorough market and property analysis before making any investment. Studies have shown that the importance of conducting the analysis is that it helps an investor to establish whether he or she will enjoy good profit margins and growth from an investment (Coppola, 2014). Real estate is a complex investment that requires an investor to have a good comprehension of the most significant aspects that often influence one’s ability to make decisions that are well informed and intelligent enough.

Discussion

According to experts in commercial real estate, investment decisions are often influenced by several aspects. One of the most significant aspects is the location of a property (Ling & Archer, 2017). To have a commercial real estate property that has the potential for a high return on investment, it is important to ensure that it is located close to social amenities such as schools, hospitals, shopping centers, major highways, and religious centers.

Also, investors need to choose tax-exempt and peaceful areas for their properties. The main reason for this is the fact that these elements make commercial properties more affordable and attractive to their clients (Coppola, 2014). Experts also argue the location of commercial properties is important in ensuring that the needs of the targeted clients are met in terms of scenic views and neighborhood status.

Choosing the right location for commercial real estate investment constitutes informed and intelligent decisions because property valuations are often based on their proximity to essential amenities such as markets, warehouses, and transport hubs all of which are integral elements in the daily activities of the clients (Rodgers & McFarlin, 2016). To make the right decisions, experts advise that an investor should make an effort of checking the ownership and intended use of all the free land in the locality to ensure that their future usage will not compromise the profitability of their investment (Ling & Archer, 2017). Adherence to zoning regulations helps one in choosing the right location for commercial real estate investment.

Another significant aspect of real estate investment decisions is the horizon and purpose of investment. Studies have shown that low liquidity is one of the characteristic elements of the real estate industry that can easily compromise the ability of an investor to achieve high profitability form commercial properties (Coppola, 2014). The ease of entry and exit in real estate investment often leads many people to invest without a clear purpose. Investors need to have a good comprehension of the numerous real estate horizons and choose the one that aligns with one’s investment purpose.

They can buy commercial property for self-use, leasing, as well as for selling on a short-term or long-term basis. All these categories have unique dynamics that can lead to unexpected results and financial distress to an investor if the purpose of investing is not clear enough. Buying a property for self-use helps one to save money on rentals. Besides, one tends to enjoy the benefits of self-utilization, as well as the appreciation of the property’s value (Coppola, 2014).

Buying property for commercial purposes such as leasing helps an investor to enjoy the regular income and the long-term value appreciation. This means that the investor will become a property owner, which will require adequate preparation about managing tenants, meeting regular costs relating to repairs, as well as enhancing their capacity to handle disputes and legal issues related to the leasing of properties. Investors can also buy a property to sell for short-term benefits or long-term use such as a retirement home.

Understanding these categories constitutes informed and intelligent decisions because an investor will buy a property depending on its valuation and ability to reward him or her with sustainable profit margins and prolonged growth. According to experts, investors in commercial real estate need to have a clear purpose for buying property as a way of cautioning them from poor investment decisions characterized by monetary loss and acquiring properties of low value (Ling & Archer, 2017).

Decisions for commercial real estate investment are highly dependent on the ability of an investor to manage the pitfalls associated with loans. Investing with borrowed money helps to amplify potential gains at the risk of greater losses. Although loans provide an investor with a certain degree of convenience, they also attract big costs because they tend to commit future income to get utility whose cost of interest is spread across several years (Coppola, 2014).

Investors should avoid ignoring the risks associated with loans if one intends to maximize their benefits. When taking loans to finance a commercial real estate investment, an investor must consider the projected future earnings, which often determine the ability to adapt a sustainable payment plan. Therefore, an investor should choose a mortgage loan that fits his or her situation by considering crucial elements such as charges levied by financiers, as well as terms and conditions (Ling & Archer, 2017).

Also, an investor should take time to look around and bargain for a deal with lower interest rates and insurance premiums. This is a crucial element of informed and intelligent investment decisions because the success of real estate investments requires a lot of financing. Therefore, a decision on whether to take up a fixed rate, adjustable floating rate, interest-only, or zero down payment mortgages should be of paramount importance before making a real estate investment (Rodgers & McFarlin, 2016). The main reason for this is the need to maximize the return on investment and growth potential of a property.

Another important aspect of investment decisions is the state of the economy in terms of the rate of employment and incentives for investment. Research has shown that the success of real estate investment is highly influenced by the spending power of the people (Rodgers & McFarlin, 2016). This phenomenon is often dependent on the rate of employment, in that the higher the number of people with a steady income in an area the higher the likelihood that they will purchase homes or increases the demand for better housing. Experts argue that a high rate of employment leads to an increase in homeownership, thus resulting in a drop in inventory and a rise in prices (Ling & Archer, 2017).

Therefore, buying properties to sell them at a profit is very sensitive to an investor. Also, an investor can opt to buy houses at low prices in areas where the rate of unemployment is high to sell them as soon as the economic climate of the areas starts to show signs of improvement. However, such decisions cannot be made without conducting a thorough market analysis. The economic potential of an area can be determined by assessing any proposed developments and the existing amenities.

An investor should also assess the state of the economy in terms of the rate of construction in an area. If the number of homes being built is very high, chances are the value of properties in the area is very low. On the other hand, if the constructions are limited, the value of properties is often high due to high demand and limited supply. These elements play a pivotal role in helping an investor to make informed decisions because one will choose an area that will attract a high return on investment (Ling & Archer, 2017).

Conclusion

Real estate investments have a high-value return profile that can be hard to ignore for any investor. However, the success of commercial real estate investments is highly dependent on informed and intelligent decisions. Significant aspects of investment decisions include the location of a property, the price, potential income, taxation, zoning laws, the purpose of investment, and the source of financing. Thoughtful consideration of these aspects plays a pivotal role in helping investors make decisions that enable them to reap maximum benefits while mitigating any related risks.

References

Coppola, C.R. (2014). How to win in commercial real estate investing: Find, evaluate & purchase your first commercial property- in 9 weeks or less. New York, NY: RDA Press.

Ling, D.C., & Archer, W. (2017). Real estate principles: A value approach (Mchill-hill/Irwin series in finance, insurance, and real estate) (5th ed.). New York, NY: McGraw-Hill Education.

Rodgers, W., & McFarlin, T.G. (2016). Decision making for personal investment: Real estate financing, foreclosures and other issues. New York, NY: Springer.

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IvyPanda. (2020) 'Real Estate Investment Decisions'. 13 December.

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