Investing in real estate is one of the smartest ways to use your money. Investors can enjoy stable cash flow, passive income, tax advantages, and other benefits. Real estate properties also rarely depreciate so that you can sell your assets at a higher price.
One way to invest in real estate is buying your own house and land. But if you’re already a homeowner and want to grow your real estate portfolio, investment properties are an ideal option.
Why Invest in Investment Properties
An investment property can be land, a building, or part of a building you can buy to earn a return on the investment. It can be through rental income, resale of the property, or both. You can hold these properties on your own. But they may also be held by a group of investors or a corporation.
Your investment properties are not used as your primary residence. The income they generate falls outside the scope of your regular line of business. This income can be interest, rents, or dividends.
As an investor, you need to be smart in using your investment property. The way you use it can greatly affect its value. For example, the property can be used for both commercial and residential purposes. You have to look into the advantages and disadvantages to see which purpose is the best and more profitable.
Purchasing Your First Investment Property
Investing in real estate is a huge decision to make. Take time to research to ensure you’re making a smart purchase. Keep in mind there are three types of investment properties you can buy.
- Residential — these are properties you can turn into rental homes. They are an excellent source of income since you can get money from monthly rents. Residential properties can be condominiums, apartments, single-family homes, and town homes, among others.
- Commercial — these properties are used for business purposes. They are popular among corporations. This type of property often has higher maintenance and improvement costs. Despite that, commercial properties usually have higher rents that can offset the maintenance costs.
- Multi-use — these are properties you use for both residential and commercial purposes. A building, for example, can have a restaurant and a convenience store while having residential units upstairs.
Once you have decided what type of investment property you want to buy, you need to figure out how you will finance your investment. The first golden rule in buying a property, be it for your primary residence or investment property, is to save a decent deposit. The amount of your deposit can affect your loan application. Most lenders would require you to deposit at least 10 percent of the property cost.
Keep in mind that investing in property can be costly. You have to pay for conveyancing fees, legal costs, stamp duty, pest and building reports, etc. These costs can have an impact on overall returns.
When you have already purchased a property, you also have to pay for other costs. These include landlord insurance, building insurance, property management fees, land tax, and repairs and maintenance costs. You also have to pay for the tax of your investment property upfront regardless of the tax deductions.
You can use your rental income to pay for these costs. But there’s no guarantee that your property won’t be empty, so you have to have a backup plan.
Make sure to purchase a profitable investment property. Consider investing in properties with appealing features, such as a garage, a second bathroom, and access to shops, schools, and other amenities. Such properties can be in demand and minimise your vacancy rate. Your rental properties will likely be kept occupied, giving you a more stable cash flow.
Location is also a crucial factor to consider when buying a property. It’s best to invest in properties in areas with high growth, low vacancy rates, and higher rental yield. Conduct research about the area to find out proposed planning changes that may affect property prices in the long run. Future developments in the area can also have an impact on the appeal of your property.
Like other investments, purchasing an income property can be risky. That’s why it’s important to invest your money in different markets. Apart from real estate, growth investments, like buying company shares, are also a smart way to secure your money.
Investment properties offer an excellent way to generate income through rental fees. But there are plenty of factors to consider before you purchase to ensure you’re making a smart decision. Take time to research to understand further how the market works and how you can benefit from it.
