Tips for first-time property investors
According to CBRE’s Q2 2016 Dubai real estate market report, residential property prices in Dubai have fallen by 12 per cent year-on-year and 2 per cent quarter-on-quarter. At the same time, there are a number of new affordable real estate projects being introduced in the market, offering attractive prices as well as stretched-out payment plans.
If you’re a first-time property buyer, the factors involved in such an investment can leave you feeling overwhelmed. Here is a fundamental guide from Souqalmal.com to help you get started.
The decision to purchase a property
Unlike bonds or stocks, a real estate transaction involves a number of key players which makes the nature of such investment more complex. The purpose behind your property purchase and the risk you are willing to undertake are the biggest determiners in deciding what property to invest in. Depending on whether you will be using the property for personal use or as investment, your search should focus on the purpose you expect the property to serve. This means investors who are interested in earning ongoing returns in the form of rent must look at property types which yield higher return. It may be so that an apartment yields better returns than a villa in a particular area.
To get a feel of the market, it’s good to check market listings of similar properties in comparable locations before you make a purchase. Once you have your eyes set on a property, it’s also important to do background checks of all entities involved in the transaction. Getting a surveyor to value the property is definitely a smart move, however keep in mind valuations from two different surveyors can be contrasting. If the land and property laws as well as the different costs involved get too confusing, hire a real estate attorney to aid with the purchase process.
Rental returns and the cost of holding real estate
So you’ve successfully made your investment, what next? What’s an investment without any returns? It’s a good idea to rent out your property and make money on your investment. Some of the costs that you will be incurring as a landlord include, but are not limited to mortgage repayments, maintenance charges, insurance, etc. These are definitely going to determine the rent you charge your tenants, which should ideally be enough to cover your costs and also make some gains.
One of the commonly used metrics, which can be used to assess the performance of real estate is capitalization rate. It is the ratio of the net cash flow to the property’s purchase price. Net cash flow is the net income you receive from the property after deducting the total expenses incurred. This ratio represents the returns you are making on your initial investment.
Knowing when it’s time to sell
Apart from making rental gains on your investment, you might decide to sell off the property to reap a profit. The best way to earn high returns on your property is by taking advantage of capital appreciation, which is an increase in the market value of your property over time. The laws and regulations associated with selling property can get tricky which is where an attorney can be of help. What’s also important is to question the increase in the value of your property and the reasons behind the same. This could be driven by fundamental factors such as circumstances in the region, new businesses etc. or by speculation. Being aware can prevent you from getting caught in a real estate bubble and will also help you achieve maximum gains when you sell.
Factors to watch out for
The Dubai real estate market has been in the headlines in the global property market over the last decade. Though the market saw a recovery after the financial crisis of 2009, you should always keep an eye on all the contributing factors that might affect the industry. External factors like market demand, economic conditions, and government regulations have a huge impact on real estate. Being aware of the macro-economic conditions as well as assessing your risk appetite is crucial.
On one hand, regulations can limit you from charging higher rent while on the other, an interest rate hike can push your mortgage costs up. A careful examination of all the fees and charges that you are likely to pay can give you a good estimate of the real cost of buying or selling property in the UAE. Make sure not to put all your eggs in one basket, and always be prepared with sufficient cash flows to withstand any market changes.