The majority of the time, when people talk about investments in property, they are referring to residential investment properties. These are homes, apartments, or townhouses that you purchase and rent out to others.

It’s important to remember that you can invest in other forms of property as well, such as commercial property (property rented to a business). You may be able to invest in small portions of a property rather than the entire home in certain situations, such as through an exchange traded fund (ETF) or a fractional investment platform. 

Unlike buying a home, investing in the right property is solely a financial decision. As a consequence, it’s crucial to think like an investor and comprehend the priorities and tactics that go into making a good property purchase. To begin, find out exactly what you want from your investment property. Many investors chose to invest in real estate for one or more of the reasons mentioned below.

Investing in real estate offers financial security and Income

There are several reasons to be careful about where you spend your money in such an unpredictable economic world. However, one of the key benefits of the property development sector is that it gives the investments a degree of stability and assurance. 

Property investment returns are classified into two categories: capital appreciation and cash flow. The distinction between capital appreciation and cash flow is that capital appreciation is the rise in the value of the property itself, while cash flow is the profit you receive per month from rent. If you invest wisely, you should be able to achieve a positive monthly income in addition to increasing the property’s value over time.

Even taking into account void periods, this income is steadier than other forms of investment.

Growth of capital

Capital growth refers to the rise in value of a property from the time it is bought to the time it is sold. There’s always the risk that the value of your home will drop. To optimise your capital growth over the medium to long term, you should consider purchasing a suitable property in a low-demand region and holding onto it long enough for demand to increase and the property’s value to appreciate. Most property markets typically experience ‘cycles’ whereby demand and supply ebbs and flows, leading to increasing, decreasing or flat average capital growth over time.

Rental yield

Yield is the ‘return’ you get on a property purchase, which is typically in the form of rent. The gross rental yield is determined by taking the annual revenue, or rent, from a property and dividing it by the property’s sale price, or value. Although gross rental yield is a decent general indicator, nett rental yield is a better predictor of your expected return. When you add all the other costs of your investment, such as interest and other mortgage costs, taxes, premiums, and strata fees, you arrive at this amount. Keep in mind, rental yields can fluctuate due to supply and demand and are not guaranteed by past performance.

Cash flow

The sum of money flowing in and out of your investment is referred to as cash flow. Many property owners favour a positive cash flow policy, which ensures that the property’s revenue covers the property’s interest and other outgoing costs. This is also known as ‘positive gearing.’ Negative gearing, on the other hand, happens when your rental revenue is less than your outgoings. In this situation, you will be entitled to subtract these losses from your taxable income at tax time.

Now that you have a general understanding of what you want to get out of property investment, it’s time to decide the type of property you want to purchase and the type of tenant you’d like to rent it to.

What type of property?

You may be looking to buy a home, an apartment, or a vacation rental, depending on your budget and investment goals. The type of property you purchase will affect the amount of rent you earn, as well as the upfront and recurring costs.

Where should you buy?

When looking for an investment property, this is one of the most important questions to ask. You should be assured that the property will grow in value over time and produce a healthy rental income for you. However, you must be prepared for the risk that the property will lose value and will not produce rental income.

The proximity of public transportation, healthcare, food and retail outlets, childcare, schooling, and other facilities may have a huge effect on the amount of rent you charge.

What will your tenant want?

Consider amenities that will cater to the type of tenant you want to attract when choosing a house. Bear in mind that the features that are important to you might not be as important to your tenant.

Certain features, such as an internal laundry, balcony, second bathroom, air conditioning, car parking, or extra storage, are in high demand, especially among investment apartments. You can always make improvements to a property yourself (subject to council approval) that can improve your rental income potential before or even while you’re renting it out. Small renovations, such as upgrading bathroom fixtures or simply adding a fresh coat of paint, can often make a big difference. When might a residential investment property suit your goals?

1: You have the right expertise

Despite common belief, not all investment assets appreciate in value. Many people encounter are perplexed by the fact that investment properties purchased in major cities can and do lose value on a regular basis. If you think a residential investment property is right for you, you can either learn the skills to select a successful investment property on your own or employ an independent buyer’s agent to assist you. Know that just because you’ve stayed in a house doesn’t mean you’re an expert on real estate. If you don’t have the requisite skills, you’ll either have to practise them or find someone to do it for you. It’s the same for stocks: just because you’ve worked for a company doesn’t mean you’re automatically able to start investing in it.

2: You have time to devote to it

Residential investment assets can be very challenging in terms of investments. In general, you’ll have to negotiate with real estate brokers, tenants, and authorise renovations, among other items. A residential investment property may not be right for you if you don’t have the time.

3: You have a long-term investment timeline

The cost of buying and selling investment properties is usually high. This is true both financially and in terms of time. Like I previously said, you cannot ‘sell a bedroom,’ so selling your home is a huge decision. For this reason, residential investment properties generally don’t suit short or medium-term goals like saving for your children’s private school education or saving for renovations.

4: You are willing to take on some risk

When you buy a residential investment property, you’re not just putting your money on the line; you’re also investing money that you’ll have to repay, plus interest and fees, regardless of how well your investment performs. It’s important to know your risk tolerance and approach investment evaluations without emotion. If you need clinical support, this is another situation where it’s a good idea to pursue it.

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Any advice provided by Laverne is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.