What Represents an ‘Over-Investment’ in Real Estate

Investing in real estate involves risks and rewards – and usually the higher the risk, the greater the potential for significant gains and losses of invested equity.

 

Investing in real estate involves risks and rewards – and usually the higher the risk, the greater the potential for significant gains and losses of invested equity. Intuitively, we understand that it’s necessary to take more investment risk in order to achieve higher returns. But how much is appropriate? And how can you quantify investment risk to figure out if it’s a chance you want to take? How do you know if your investment is an over investment?

 

1. Before buying, scope out an area and determine if it’s the kind of community you wish to live in. Take note of the manner in which yards are kept; kind and condition of homes and cars are in; amenities in place and condition – pools, tennis courts, etc.

 

The area will give you an indication as to the residence, how the uphold the neighbourhood and what to expect once you buy, move in or rent out your property.

 

1. Research the demographics of residents in the community especially the kind of work they do, professionals or not. Income levels currently and future potential are important because they will indicate the ability of residents to maintain their homes and upkeep the community.

 

Ensuring that your investment is not an over investment relies largely on the location and community your property resides in. Is it an community with frequent break ins? Do the neighbours take pride in their homes? Whether you like it or not, these factors contribute to the overall perception of your neighbourhood and directly impacts the value of your investment.

 

1. Find out the average value of a home in the community.  This is important for purposes of capital appreciation and investment recovery.  Eg. if the average home is a 3 bed 2 bath home and costs or is valued at $300,000 you do NOT want to build or buy a home that is 10 bedrooms 10 bathrooms for $1 million.  This represents an over investment.  When it is time to sell, it is unlikely that you will be able to recover your investment of $1 million.  In all likelihood you will realize a loss on your investment.

 

Be practical and consistent with what you buy or build in your community of choice.

 

Often, property investors don’t realize how important it is to take these factors into account, so they don’t end up in over- investment. Investors should ask about how much is used to capitalize an asset, and ensure they are receiving a return commensurate with the risk.

 

Ultimately, real estate investors should inquire about these risks and receive straight answers to be more confident in their investing decisions. Be aware of any investment opportunities that don’t make all risks involved crystal clear.