An investment property provides one of the best opportunities to make passive income from your property investments. While investing in property is not the cheapest business to start, it can yield some of the best returns on your investment. When you have a property investment you can make a significant amount of money from it and if you have a handful of investment properties then you have the potential to make even more money.
In this article we will cover what an investment property is and everything you need to know before you decide to get started with investing in properties so you have a clear understanding of everything that is involved in this business and fast track your success in the real estate industry.
What Is An Investment Property?
An investment property is a real estate property purchased with the sole intention of making money from the property and earning a return on investment and also making a profit. This can be done through rental income, the future resale of the property or both. The investment property may be owned by a single individual investor, a group of investors or a corporation.
Investment properties can be looked at as either long term or a short term investments. If in the instance that the property is looked at as a short term solution, the owners/investors of the property may engage in the act of flipping, which is when an investor purchases a property and then later, but relatively quickly, sells (“flips) the property for a higher price than they paid for it and they keep the difference as their profit for the flip.
The Different Types of Investment Properties
A property that generates an income does not always have to be a residential property. In many cases investors and some corporations will purchase commercial properties that will be used for one specific reason and that is for business purposes. There is one minor con to purchasing commercial properties and that is often maintenance and improvements to the property come at a much higher price. But this higher cost can quickly be offset by the much higher returns that a commercial property can generate.
The reason that a commercial property brings in much more revenue is because the lease/rental agreements for commercial properties often command higher rent prices, bringing the return on investment for these types of properties up.
Some examples of commercial properties include apartment buildings, retail stores, office buildings and. medical centers.
This is the most common form of investment property and residential rental homes provide everyday investors the opportunity to supplement their income through the profit that is generated from their rental properties. This is achieved by first purchasing a residential property, doing any maintenance on it and making any necessary improvements to the property.
The investor will then start the process of trying to find tenants to occupy their home so that they can generate passive income through charging the tenant a monthly rent. The process of finding tenants for the home can be done by the investor themselves or they can seek the help of a property management company to assist them in the screening process of tenants. This is often the route that most investors decide to take as it will take a lot of stress and headache off their shoulders and they can focus on the things that are important with their property. Property management companies often have years of experience with screening and dealing with tenants so it is a great solution if you are looking to find tenants for your current investment property.
Some examples of residential investment properties are single-family homes, condominiums, apartments, townhomes, or other types of residential structures.
If you would like to learn more about how we at Legacy can assist you with any and all of your property needs then you can get in contact with us.
A mixed-use property is a building that serves the purpose of being both a residential property and a commercial property at the same time. For example, a property unit may have two floors and on the first floor there is a retail store such as a liquor store or a clothing shop and then on the second floor there is a residential home that a tenant may live in.
How An Investment Property Works
When we talk about investment properties we are not talking about the primary residence of an individual. An investment property is a home that is purchased with the sole intention of earning a return on investment for the owner. In some situations the investor may live in a portion of their investment property but typically we are talking about separate properties or second homes that generate an income for the owner.
Investors often look at what will be the best use of their property and weigh out all the pros and cons to figure out which situation will yield the biggest return on investment. This is what is commonly known as the property’s highest and best use. Once the property owner has figured out the highest potential for return they will then go ahead and use their property in that manner and generate the most income that they can with their property/properties.
There are situations where people purchase second homes such as if a person is living in the city and then they purchase a second home in the countryside to vacate to on Weekends. Take note that in this situation the second home is not classified as an investment property, because it is primarily being used for personal use and is not generating an income for the owner.
The Process of Financing Investment Properties
While borrowers who secure a loan for their primary residence have access to an array of financing options including FHA loans, VA loans, and conventional loans, it can be more challenging to procure financing for an investment property.
Insurers do not provide mortgage insurance for investment properties, and as a result, borrowers need to have at least 20% down to secure bank financing for investment properties.
Banks also insist on good credit scores and relatively low loan-to-value ratios before approving a borrower for an investment property mortgage. Some lenders also require the borrower to have ample savings to cover at least six months’ worth of expenses on the investment property, thereby ensuring the mortgage and other obligations will be kept up to date.
Things To Take Into Consideration
When you are looking to invest in a property, keep in mind that it will probably be one of your biggest investments and you should take all the necessary steps and cautions when you purchase a property as an investment as you would a property that you would use as your main home. The last thing you want to do when buying an investment property is make a bad choice of home, buy at the wrong time in the market or buy in an area that will not allow you to make the most amount of return on investment.
Costs Not Included In The Purchase Price
Transfer Duty – When a property is purchased there is a tax that goes along with it that needs to be paid to the government. It is the cost to transfer a property from one person to another person. It is always the home buyer who pays the transfer duty, not the seller. Usually, your solicitor will pay it on your behalf as part of the purchase process.
Bond Registration Costs – Most people require the assistance of a bank to purchase their property. The bank will loan you money and in return you will have to provide the bank with some form of security, which is usually a bond registered over the property. The bond allows the bank to take the property away in the event of default. The bond registration will also be done by a conveyancer (not necessarily the same conveyancer doing the transfer) and the cost is also determined by a tariff.
Property Transfer Costs – Property transfer costs are different from the transfer duty that needs to be paid on every purchase of a new property by the buyer. In order to effect the transfer, you will need an attorney who is also a conveyancer. This is a specially qualified attorney who is allowed to attend to the transfer of property. The amount that you will pay is set out in a tariff guideline and varies with the value of the property.
Advantages of Purchasing An Investment Property
When it comes to investing in real estate, often the investments that you make and the returns that you receive are more stable than traditional forms of investing. If for example you take a look at investing in the stock market. This has high risk attached to it and there is a possibility that you will lose all of your investments.
When you invest in real estate on the other hand, if you do everything correctly you will receive a stable monthly passive income from your investment for many years to come. Investing in properties is one the best ways to invest your money for long term profit gain.
If you purchase a property or properties with the sole intention of earning a rental income from those properties then you can sleep well at night knowing that your income from your properties is pretty much guaranteed every month. Provided that you do not have any loss of tenants or your tenants decide to stop paying their rent for whatever reason.
But even if your tenants decided to stop paying rent, as a property owner and landlord you can implement a few things in order to ensure that you get your rental income and your tenant is also legally required to pay their rent each month provided that they have not filed a formal complaint against you as the landlord.
If you purchase the property in a good location, the property value will increase and you can generate more profit.
Any tax associated with the expenses paid on the investment property, such as property maintenance, council rates, fees charged by managing agents can be claimed back at the end of the financial year.
If you have an investment property, you can also use the existing equity in the property to get another loan or to purchase another investment property.
Disadvantages of Purchasing An Investment Property
While investing in properties is one of the best ways to generate a passive income these days, keep in mind that the initial costs of buying a rental property/properties is typically quite high. You might need to seek the financial help of your bank and get a loan in order to purchase your first rental property and start generating a passive income
If for any reason you are needing to sell your property then also know that it can take quite some time to actually sell the property and it may remain vacant on the real estate market for an extended period of time before you actually find someone that is willing to purchase the property. This makes your life difficult if you are in a financial pinch and need to sell your property as soon as possible. Many factors play into the amount of time your property will remain on the market before the sale but one of the most common reasons is that the property is located in a not so ideal area and people are not willing to purchase in that area.
We hope we covered all of your questions in this article, but if for any reason you still remain unclear on anything then feel free to get in touch with us here. With many years of experience we know what it takes to succeed in this industry and we would be more than happy to help you out and answer any and all of your questions or concerns that you might have.