Simply put investment property is real estate property that has been purchased with the intention of earning a return on the investment, either through rental income or though capital gain with the future resale of the property.
The former will provide an ongoing and increasing whereas the latter can only be realised by selling. Another strategy is to use gearing which is holding the property, releasing some of the equity that has been created through growth and using that equity to secure another property. But that is a whole other topic.
Successful property investment require skill, a lot of research and education and risk but it can be calculated. The way in which an investment property is used has a significant impact on its value. Investors sometimes conduct studies to determine the best, and most profitable, use of a property. This is often referred to as the property’s highest and best use. While borrowers securing a loan for a primary residence have access to an array of financing options and conventional loans from a variety of banks; in most cases, it is more challenging to procure financing for an investment property than for a primary residence. Additionally, to approve borrowers for a mortgage for an investment property, banks insist on good credit scores and relatively low loan-to-value ratios. Some lenders also require the borrower to have ample savings to cover six months’ worth of expenses on the investment property.
Here are some lessons that might help ease some pain on your property investment journey:-
- Understand ALL the costs involved in ownership – the cost to get in, the costs of management, repairs, maintenance, rates, taxes and of course those involved in exiting when you sell.
- Good tenant selection is critical and when you have good ones, look after them. A well-maintained property is one that won’t present any unexpected surprises – they can be costly and always come at the wrong time. Having a rental manager does not mean you can set and forget – remain involved, ask questions, attend a periodic inspection at least yearly and insist on getting a report about any upcoming maintenance. That will allow you to budget.
- Plan to be a long term holder of property. Savvy investors don’t sell – they accumulate and use leverage.
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