Tips to keep in mind when making a real estate investment
When it comes to real estate investment by speculation, there is no clear separation as to when the investment begins and when the speculation begins. We understand that all investment essentially involves speculating on the increase in value that a certain property may have before making the first investment. And to a large extent, the percentage of profit that is expected to be achieved on resale will depend on this relationship.
Real estate investment by speculation in many cases involves taking advantage of changes in the markets to obtain greater benefits on the sale of a property. Speculation in real estate can occur over long periods of time, even decades. As a result, the practice of buying properties that are undervalued or that perhaps only need small repairs to improve them and increase their sale price has become very common.
Short-term investors play a kind of arbitrage role in the real estate market, especially to promote properties that agents are looking to sell quickly. In some cases, these agents may not have the capital to make their properties live up to market expectations. For this reason, many decide to partner with investors who can invest and add value to the properties.
How to proceed when faced with a real estate investment due to speculation
Whether it is a quick speculation investment; that is, purchase-sale, or an investment to keep the property as a rental property, we must take into account some important aspects when making our first investment on the desired property.
When you want to make a sale, we must start by looking at the properties that we have at our disposal. To make the right decision it is very important to have knowledge of the market; that is, we must know how much the properties are selling for in a given market. If you are not an expert on the subject, it is advisable to have the advice of an expert real estate agent in the locality of your interest.
At Golden Mile by Remax, we indicate to our clients the current value of a property in a certain location by doing a technical analysis of the market. Once you know how much a certain property is worth, you can set the value for which it can be sold. On this aspect you must work very quickly due to the variations that may arise in the market. For example, if we consider Tenerife, the local market may present variations after six months, that is, the value that a property can have today in a year or a year and a half varies to a greater or lesser extent.
Set the right price for a property
The resale price of a property should include between 15% or 20% of the cost of profit. It is important, before setting the resale amount, to take into account the expenses involved in the purchase of the property. If the purchase is made with your own money, it must be taken into account that 8% of the budget should be allocated to purchase expenses. This 8% is divided between ITP (Property Transfer Tax), registration and notary fees, and property services.
Now, let's imagine that we have a property with a re-sale cost of 210,000 euros, and that we can get it for an amount of 150,000 euros. To those 150,000 we must add the corresponding 8% (approximately 12 thousand euros). After this addition, the investment of the property would be in the order of 162,000 euros.
To have a correct investment, you also have to take into account whether the property requires reforms or not. Once you visit for the first time, you have to take into consideration what type of reforms it requires and what would be the budget necessary to implement it. If you do not have experience, it is very important to have the help of a trusted master builder to make a quick indicative estimate on the first visit to the property. We are going to add this budget to our initial expense.
One last tip
If the property is in good condition and you only need what we call a “face wash”; i.e painting and adding some new furniture, our budget shouldn't increase greatly. Unlike if it were a structural remodeling, such as the change of the electrical system or the plumbing system which raises costs. Suppose we need 5000 euros to make some arrangements on the property. In total, we added 167,000 euros to our initial budget.
It is important to always bear in mind, if we want to make an investment by speculation, that we must be very fast when setting the price. There are many people in the market who also want to make an investment, that is why it is necessary to act quickly, since in a matter of minutes a business can advance or fall. You must take this advice into account, and above all you must have the help of a professional when selling the property. The speed of the process also depends on the confidence you have in the agent looking to sell the property.
To conclude, we give you one last piece of advice, once the property is on the market, if the first offer that comes in is reasonable, don't hesitate to take it. You must be careful not to fall into greed when selling the property. If an offer arrives that is reasonable in terms of profit and investment, and can also be done quickly, you should not think about it. There are times where you can earn 20%, and others where you can close with 10% even. The fundamental thing is that the money does not stand still.