Most people invest in real estate for two reasons: To generate passive income through renting and for future capital gains when the property is sold for a profit.

It goes without saying that buying an investment property is a significant financial decision that requires careful consideration. Here are some key factors that can help ensure your investment will pay off over time:

Market research

Do a thorough market analysis to understand the local real estate market trends, vacancy rates, rental demand, and property values. Consider factors like population growth, job market stability, and development plans in the area. Research similar properties in the area and analyze rental rates.

Rental income potential and yield

Research areas with strong rental demand and yield to ensure that the potential rental income covers your property expenses, including mortgage payments, taxes, insurance and maintenance.

Rental yield is basically a measure of how profitable a property can be. Gross rental yield does not take property expenses into consideration and is calculated as:

Gross rental yield = (Annual rental income / total property value) X 100

For example, an investment property worth $500,000 with expected rental income of $500 per week gives you the gross rental yield of:

($500 X 52) / $500,000 X 100 = 0.052 X 100 = 5.2%

Net rental yield includes property expenses in its calculation and is a better gauge of the profitability of the investment. Using the above example, assuming you pay $4000 annually in property expenses. Net rental yield is calculated as:

Net rental yield = [(Annual rental income - annual expense) / total property value] X 100

Net rental yield = [($26,000 - $4000) / $500,000] X 100 = 4.4%

Location

“Location, location, location” is a cliche for a reason: Properties in popular locations are more likely to appreciate in value and attract a higher rental yield. Look for areas with strong economic growth, low crime rates, good schools, amenities, and proximity to transportation and employment centers.

Property condition

Assess the condition of the property, including its age, structural integrity and any necessary repairs. A property in good condition may require less maintenance and attract higher-quality tenants.

Financing options

Explore different financing options and compare interest rates, loan terms and down payment requirements from various lenders to determine the most suitable financing for your investment.

Exit strategy

Have an exit strategy in place in case you need to sell the property or change your investment strategy in the future.