Table of Contents
- What is an Investment Property?
- Types of Investment Properties
- Sourcing an Investment Property
a. Online Portals
b. Real Estate or Property Agents
c. Property Auctions
- Financing Investment Properties
a. Taxes and Fees
b. Investing Overseas
- Alternative Real Estate Investment Options
What is an Investment Property?
An Investment Property is a real estate asset purchased for the purpose of generating capital returns. These returns on the investment may be generated either through renting the property to produce rental income, capital gains from the appreciation in value of the property, or both. Investment Properties may be owned by an individual investor, an institutional investor or a group of investors.
Investment Properties can be held for the short or long term. Long term investments often involve renting the property out for a prolonged period of time, before potentially selling it to reap its natural capital appreciation.
With short term investments, investors typically “flip” the property, doing construction and maintenance work to actively increase the value of the property. With this value-add strategy, investors receive capital gains, calculated as the increase in value between the property’s purchase price and selling price.
Read also: Knowing Your Capital Stack
The most important attribute of an investment property is that it is not used by the investor as a primary residence. The size of the returns generated can vary significantly, depending on the investment strategy used and the economic climate throughout the investment period.
Types of Investment Properties
Residential Investment Properties may range in size and type. With Residential rental properties, people living in the property pay the owner a predetermined sum of money to live there. Lease lengths may vary depending on the rental agreement and terms. The most common residential lease lengths are month-to-month leases, 12-month leases or 24-month leases.
In the case of Residential value-add properties, investors purchase the property and complete renovations on the property, usually within a short time frame. During this time, the investor may not use the property to generate rental income.
Some examples of Residential Investment Properties may range from the typical landed houses or apartment buildings to student accommodation.
Commercial Investment Properties generally refer to office buildings or skyscrapers. These properties range in size and can be occupied by one or more companies. Because of the more permanent nature of office locations, commercial buildings tend to have longer multi-year leases.
As a result, Commercial Investment Properties tend to have better long-term stability, providing investors with a steady cash flow and consistent rental rates.
However, Commercial properties are generally seen as more volatile and rental rates may see a significant increase within a short timespan, but longer leases prevent landlords from making the most out of this since rental rates cannot be adjusted quickly.
Read also: An Analysis of COVID-19’s Impact on Office Real Estate Demand
Industrial Investment Properties may include warehouses, factories, storage facilities, laundromats, or any special purpose real estate type that receives sales from customers using it.
Industrial property investments provide investors with the opportunity to generate multiple income streams through additional services on the property, which increase the investor’s return on investment.
Retail Investment Properties are real estate assets that contain retail outlets, with the most common property type being shopping malls. Investors in Retail properties get most of their income from renting out the units within the property.
However, some investors may put an additional model in place giving them a proportion of the sales generated by the retail units on top of the base rental rate, incentivising the property owner to maintain the condition of the property as a whole.
Mixed-use properties may consist of a combination of any of the above Investment Property types. Investors in Mixed-use properties get to reap the benefits of the particular property type, while also getting the additional advantage of diversifying their portfolio, reducing the overall risk involved in their investments.Sign Up at RealVantage
Sourcing an Investment Property
Online portals, such as 99.co and Zoopla allow users to buy and sell properties on their platform, providing potential investors with a way to search for properties in their desired location in their own time. Online portals provide users with an accessible way to hunt down their ideal Investment Property from a wide range of different properties.
While this allows investors to conduct their own market research and seek out comparable properties, investors ultimately will likely have to approach an agent to further pursue a deal, since most properties are listed by the property agents. There is also more competition, since properties listed on these online portals are available to anyone.
Moreover, agents may not list all the properties they have available on these online portals and certain listings may be outdated, since they have to be manually updated by the property agents.
Real Estate or Property Agents
Real Estate Agents connect properties between vendors and buyers. The quality of the buying experience can vary due to the difference between real estate agents. While registering with a real estate agent is a straightforward process, it still requires more effort than online portals. Developing a personal relationship with a real estate agent can also be a bonus, since the agent may recommend some good deals or make a recommendation to the seller.
Although agents represent the vendor rather than the buyer, some agents may make moves that favour the buyer if they are able to complete the transaction within a short time frame, such as recommending properties that need to be sold quickly or better-priced properties. However, sourcing deals through real estate agents still comes with its fair share of competition, so vendors rarely have to take up low offers from buyers.
Property Auctions have grown in popularity as a great way to find real estate deals. A lot of properties up for sale at property auctions have to be sold quickly, so buyers are more likely to find a good deal.
Buying a property at a property auction is a fast process, which is both a positive and negative, since buyers can acquire the property quickly, but also have limited time to conduct research on the property and tend to be highly competitive. As such, buyers attending a property auction should do their due diligence before attending an auction to make sure they can place a reasonable bid on the property and close a deal promptly.
Financing Investment Properties
As properties often require a larger investment than other forms of investing, investors have to secure financing for a property before entering into a real estate deal. In order to get a loan on a mortgage, investors may have to have a larger amount of capital since insurers do not cover mortgage insurance for investment properties.
Taxes and Fees
Investing in Investment Properties comes with certain taxes and fees, depending on the country. Some common forms of taxes and fees include property taxes, capital gains taxes and stamp duties. Property taxes is a direct tax levied onto a property, imposed by the government of the country in which the property is located.
Capital gains tax is most relevant to value-add investors who purchase property at a lower price then make renovations to the property to increase its value, selling it for a higher price. The capital gains tax is typically applied to the profits made, based on the difference in the purchase price and selling price.
Stamp duties are a tax imposed on a property during an asset transaction. Stamp duty is typically calculated on a portion of the value of the property, incrementally increasing with the value or number of properties owned.
Read also: Singapore Real Estate Stamp Duties Explained
Investing overseas provides investors with the chance to diversify their investment portfolio. However, selecting the right market is key to the success of any investment. Different markets are more suited to different investment strategies and property types. Investors should do thorough research before investing in properties overseas to understand the financial and legal intricacies of the markets.
Alternative Real Estate Investment Options
Real Estate Investment Trusts (REITs) are a type of fund usually structured by real estate companies to own and operate income-producing investment properties in a portfolio. Some REITs may focus their assets in a particular sector, such as healthcare, hospitality, retail, industrial or commercial, while others diversify their assets across a combination of these sectors.
Investing in REITs is considered a form of indirect investment since investors typically do not have any responsibilities or say in the management of the property. REITs invest in properties through capital collected from investors, and provide returns for their investors through dividend income generated from rents from its underlying properties or capital gains through value appreciation.
Read also: REITs or Real Estate Co-Investments?
Co-investment is an investment structure whereby a pool of investors supplement various investment opportunities. In the context of real estate co-investing, each investor contributes a percentage of the capital required to finance a real estate acquisition, which in turn gives them a percentage of ownership of the property.
The real estate co-investment platform is responsible for the sourcing, upkeep and management of the property as well as the investors’ fund. This way, investors can directly own part of a property and receive returns through rental income in the case of income-generating real estate assets, or through capital appreciation when the group of investors exit the investment and the property is sold.
RealVantage is a real estate co-investment platform connecting investors with carefully selected properties located in different countries. Each property is chosen based on its potential for risk-adjusted returns and vetted by long-time professionals in the real estate industry. RealVantage allows investors to own income-generating real estate assets in countries around the world, providing a source of passive income for accredited investors.
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