Property investment is considered to be one of the most lucrative asset classes. It’s essentially the land, along with any permanent improvements or structures attached to the land. These can be natural or manmade, including water, minerals, trees, buildings and bridges. Although a common form of investment, there is a lot to learn about property investment in order to become a successful investor.
What influences the value of property investments?
The economic characteristics of property can hugely affect the value of the investment. As with all investments, initial cost, supply and demand, and market conditions can all impact the return on investment. However, property also has a few unique characteristics that affect ROI.
Scarcity – Althoughland isn’t considered to be rare, the total supply is fixed. Meaning, the basic economic principles of supply and demand are not as prominent in real estate investment since a substantial change in the supply of land on the market is unlikely.
Structural improvements – Any additions or changes to land or a building that affects the value of the investment is called an improvement. There’s a difference between private improvements, including the building of homes, fences and decor, and public improvements, such as sidewalks, or sewer systems.
The permanence of investment – Once the land has been improved, all the capital and labour allocated to the building improvement represents a sizable fixed investment. Despite the fact the building can be razed, improvements like drainage, electricity, water and sewer systems tend to be permanent since they cannot be removed.
Location – A preferred area refers to the choices and preferences of people regarding a given area. Value is determined by factors like convenience, reputation, and history. It’s arguably one of the most important economic factors of property investment.
Learn about property investment before making a decision
Real estate refers to the production, maintenance, buying and selling of property and land. It’s a critical driver of economic growth and development across both the private and public sectors. As such, real estate or property can be divided into four types:
Residential property – this includes the construction and maintenance of new homes as well as the resale and purchasing of homes. The term ‘residential property’ refers to family homes, condominiums, co-ops, duplexes, multi-generational and vacation homes. Put simply, they are any buildings in which you might live.
Commercial property – all buildings and land that are owned to produce income. These include shopping centres, medical and educational buildings, hotels and offices. Apartment buildings are considered commercial, despite being used for residents.
Industrial property – includes the premises where manufacturing and production take place, including warehouses. Such buildings can be used for research, storage and distribution of goods. Zoning, construction, manufacturing, and production are handled differently to commercial buildings.
Land – includes vacant land and working farms. It can be bought, improved and sold, or retained to use as commercial property.
Ways to invest in property
The most common property investment strategy is to buy a house. Those who own a mortgage have effectively made an investment that gives them ownership of the property, as well as prospects for high returns as property prices continue to climb.
If buying a property is too expensive of an investment, it’s not the only way to add property to your investment portfolio. In fact, there are many ways to gain a stake in the property business and earn money on such an investment. As with all investments, property investment comes with high risk and reward, and different strategies are appropriate for differing appetites for risk.
Buying property for rental purposes
Owning rental properties is an ideal opportunity for investors willing to renovate the property, maintain it, and who have the patience and time to manage tenants. This strategy still requires substantial capital to finance any up-front maintenance and to cover potential vacant months.
But property remains a relatively safe long term investment that’s still likely to increase over the long term. So, if you find the right property and can secure the mortgage it remains a viable money-making proposition. Do keep in mind that investing in buy-to-let properties used to be a much stronger business.
As the growing demand for rentals continues, there is scope in the buy to let investment market to produce stable returns.
There are still some opportunities in the rental market with low prices and strong demand for rentals, but don’t assume that this is an easy thing – despite the growing cost of rent.
Pros:
Generates regular income.
Properties may appreciate in value.
Maximises capital through leverage.
Some associated expenses are tax-deductible.
Cons:
It can be difficult to manage tenants.
Damage may occur from non-permanent tenants.
Reduced income from any gaps in tenancy.
Stamp Duty on buy to let properties can be high.
Real Estate Investment Trusts (REITs)
A real estate investment trust is created when a trust, usually a corporation, manages investors’ money to purchase and operate income properties. REITs are bought and sold on major exchanges, just like any other stock. REITs are ideal for investors who want portfolio exposure to real estate, without the responsibilities of managing traditional real estate transactions.
The corporation managing the trust must payout dividends in order to retain REIT status. In doing so, REITs avoid paying corporate income tax, as opposed to regular companies that are taxed on profits and then decide whether to distribute after-tax profits as dividends. A good starting place is to research thriving REITs and purchase shares in them as a potentially profitable investment.
As a dividend-paying stock, REITs are good investments for stock market investors since they generate regular and reliable income. They act as a gateway to real estate investment into non-residential properties such as commercial real estate, which is typically not feasible for individual investors. Historically, REITs have performed well.
One of the main advantages of REITs is that they are highly liquid since they are exchange-traded; There is no need for a realtor to cash out an investment. Ultimately, REITs are formal versions of a real estate investment group.
Investors should make a choice between equity REITs that own buildings, and mortgage REITs that dabble in mortgage-backed securities (MBS). Both welcome investors into real estate, but in practice, an equity REIT is more closely tied with traditional property investment as it provides ownership in real estate. Mortgage REITs centre around the income from mortgage financing of real estate.
Pros:
Regular income from dividend-paying stock.
Holdings tend to be long term and cash-producing leases.
Cons:
The leverage that comes with traditional rental real estate does not apply.
