The Different Types of Property Investment

Property investors make money from investment property in an extremely varied array of ways. Here is a broad outline of the main types of property investment.

Property investors make money from investment property in an extremely varied array of ways.

Residential Rental Property Investment

a) Owner Occupancy:
This is the most common type of property investment, possibly the most common type of investment period. Owner Occupancy is where the owner lives in the house he or she owns. It is common for a house buyer to borrow 70 – 90% of the house’s value and take out a mortgage for 20 to 30 years. Returns come in the form of capital gains over the period of ownership.

Some residential property investors disregard this as an effective form of property investment compared to rental property because it does not have same the tax benefits that can make rental property investment so appealing.

b) Rental Property Investment:
Rental property investment involves renting out a dwelling for people to live. This could be by renting out a house, condominium, apartment, or flat. After owner-occupancy, this is the most common type of property investment because, in the case of a house, investors you can usually borrow 70% – 90% of the house’s value. This makes it perfect for investors to borrow against there own home to buy it. During the property boom of a couple of years ago, it was possible to even borrow 100%. Investors can usually borrow more for a house than they can for other types of dwellings, for example, an apartment.

Returns from rental property investment come in the form of rent from tenants and from capital gains.

Commercial Property Investment

Commercial Property Investment is the owning of premises which occupiers rent to make money for themselves. The list of examples is endless but would include warehouses, retail stores, and office blocks.

While the returns are potentially higher for commercial property, it is generally more expensive as it is often placed in high-value areas, such as central business districts. Most importantly, the amount investors can borrow is less, usually 50-70%. It is seen as having greater risks than residential property investment. One reason for this is because the occupier of the property is more vulnerable to bankruptcy than in a residential property.

As with residential property investment, returns come in the form of capital gains and rent from tenants, in this case, businesses.

Property Development

Property development is an incredibly broad form of property investment. Essentially it involves the purchasing of land or a building and improving its value for resale.

On a smaller scale, this could be simply buying a house and making a few improvements or modifications then selling. Small-scale investors sometimes prefer this to rental property investment because they do not have to deal with tenants.

It is also common for developers to buy large blocks of land for subdivision. This is more of a medium scale form of property development.

On a larger scale, this could be buying an empty plot of land and building anything from a hotel to a golf course. It involves finding a plot of land then having the imagination to see the best way to develop and market a property for maximum returns. The options for this type of development are endless. An example of one famous developer of this scale is Donald Trump.

Large-scale property development is more difficult to enter because it involves more capital and has higher risks. Because the total cost is unpredictable it is also more difficult to borrow for. However, the potential for profit on such a venture is huge.

Brand New Rules in Favor of Flipping

Residential real estate never used to like the term “flipping”, but things have changed since then. The latest changes in policies actually encourage flipping in order to sell more foreclosed homes, which are already horribly damaged – something that area realtors are also in favor of. There are hopes of this helping today’s struggling home market.

Back in the days when there was a boom in real estate and home values had risen, flippers could buy homes to sell them for a profit without increasing the value of the homes in any way. To stop this practice from going on, the rules were changed to forbid property flipping on properties financed with FHA-insured mortgages.

Because most mortgage activities today involve the FHA, some people are worried about the efforts made to stabilize neighborhoods hit by foreclosure, thinking that things will merely get worse because of the ban. This greatly involves the people who try to stabilize the neighborhood by buying and rehabilitating foreclosed homes and selling them to families with average income.

Many foreclosed homes exist today that are in extremely bad shape. Letting investors buy these properties, fix them up and sell them would be a great option since many people wish to buy houses but simply do not have enough money or knowledge to fix them up.

Banning flipping may not be the proper solution for the crisis of foreclosure, but it is definitely heading in the proper direction. This waiver even comes with a lot of safeguards to avoid inflated pricing. For example, if the home price is 20% higher than the last sale, sellers have to justify their price increase somehow.

However, some market variables may still prevent this waiver from affecting the locality too much. See, potential buyers are not aplenty anymore as the world seems to be running out of entry-level and first-time buyers. Plus, the neighborhood needs to be looked at, too. The fixed-up home might be night, but a neighborhood still filled with foreclosures will not make sales happen.

FHA financing is in high demand now, so the waiver will definitely benefit certain neighborhoods. What they need to do is get an owner for a home and improve the overall neighborhood while stabilizing the values and moving them higher.

The Market Data Approach to Property Valuation

The market data approach to valuation looks at recent sales of comparable properties in order to ascertain a market value of the property. This approach relies on the marketplace dictating the acceptable price of property in an open market situation. One valuation principle that this approach relies on is the principle of substitution. The substitution principle dictates that a practical purchaser is believed to pay no more for a property or rental than it would cost to buy or rent an equally desirable alternative property that is on the market. Essentially what this is saying is that people will not pay more for one particular property when there is an equally desirable property available for a lesser price.

Worldwide economic conditions have seen jobs lost and businesses close. With limited jobs available, the number of consumers who have defaulted on mortgage payments has increased. The flow on effect from this is that there has been a steady increase in the number of forced sales of residential properties through mortgagee and foreclosure situations. At the same time, financial markets around the world have had to tighten lending conditions due to a shortage of money flowing around the world. Interest rates, lending guidelines and requirements for greater equity behind investments have all contributed to a decrease in the number of active investors in the marketplace. Governments around the world are also getting involved, finding ways to regulate their respective property markets.

So in effect, we have three different scenarios affecting the market, in very different ways. On one hand, we have forced sales due to inability to pay for the associated lending against the property, and on the other, we have tighter lending conditions for people looking to enter the market and we also have uncertainty surrounding the tax and structure of investment properties from the government. All these issues have the same outcome, which is to generate caution within the real estate market and reduce the prices of those that are on the market.

In this current situation, it would seem that the market data approach to valuations may be the most appropriate. Given that so many variables are interfering with the value of homes, the best way to determine what a fair price it would be to look at the most recent sales for comparable properties. The drawback to this approach would be that some of the comparable sales may have been under a forced sale condition and hence may not necessarily be in an open market environment. A counter-argument to this could be that due to the number of people exiting the market at this point in time, especially through forced sale conditions, then this is, in fact, a reflection of the current market, and hence prices are fairly reflected. As prices are considered to be low (compared to 12-24 months ago) then it could be argued that those who are trying to sell their property at the moment, are only doing so because they need to do so for some reason, for example upgrading property or leaving the country etc. If you did not have to sell at the moment when prices are down, then why would you? The substitution principal supports this methodology in the fact that people will only want to pay the cheapest price for an equivalent property, all things being equal.

Another drawback to the market approach is the heterogeneous nature of property, meaning that no two items of land are the same. For the market approach to work (a comparison of similar properties needs to be collected). This means, properties with similar sized sections in the same area, with similar sized and aged dwellings and improvements on the site. Nowadays many new developments are built to similar specifications (same house design on multiple sections) and hence new areas of cities can all look very similar. This works in the market approach’s favor as determining comparable sales is easier.

Understanding the Impact of the Economy on the Housing Market

Let’s say that you’ve been thinking about selling your home. One of the things that you’re likely to do is to look around your community so that you can gauge how many other homes are available – something that is ultimately going to have a lot to do with the economy.

Or, if you’re planning to buy a home rather than thinking about selling, one of the things that you’ll want to take a look at is the way that the economy impacts your situation. You will be able to do this by taking a closer look at the way lenders are considering credit scores before approving a mortgage, the cost of homes that are on the market (and the number of foreclosure signs that you see in a given area) and you’re going to want to look at the interest rates associated with mortgage loans during a given period of time.

Each of these factors of the economy is going to have an impact on the housing market (just as each of those factors within the housing market will have an impact on the overall economy). Because the economy impacts the housing market, it’s important to make sure that you have the basics down – and an understanding that’s focused on homes in your area.

The more that you’re able to do to look at the economy and the housing market in your area the more that you’ll understand what you’re up against (the best example of this may involve the real estate market in Southern California where some homes listed just weren’t selling as the median home price dropped from close to a million dollars to less than a quarter of that amount). After all, it’s not just your personal economic situation that matters – the community around you will ultimately have an impact too. By studying the economy some, you’ll be able to better determine whether or not you should be buying or selling a home.

How To Find Rental Property At The Right Price

You have decided on your budget and now you’re looking to buy a rental property, your keen to get on the property investment ladder and the idea of being a landlord has you tingling all over. If this is you and you’re sure you are not having a stroke, then carry on reading for a few pointers on how to get the best price for your prospective property. We will use Residential Investment Property for the purpose of this article

1) Take an investment approach:
Chances are, you won’t go out and buy the first property you see. As this purchase is for an investment purpose you can remove yourself from the emotional ties that usually go with buying a home for you to live in. You can look at from a pure investment point of view and decide what will be good and what won’t. Yes, a nice big garden with lots of lawn would be great for you, but will tenants see it that way, or as just a big chore to do each weekend? You may have always wanted to live in a turn of the century villa, but will it have the same appeal to tenants? By looking at each prospect as a potential tenant and not an owner, it will help you remove some of the extra luxuries that you don’t need to pay for.

2) Make sure the returns are realistic:
The first thing you need to be comfortable with is the amount of rent you will be getting from your investment. As you view properties in different areas and for different price ranges, you will get a feel for how much rent the property would command. Rental agencies will be able to give you rental appraisals (generally for free). If you encounter a property that has unusually high rent returns for its asking price, there will usually be a reason for this. A good rule of thumb is to get a couple of appraisals from different agencies and then take the average from what they tell you. If you want to be ultra conservative then you can take 10% off that average amount and then use that figure as your rent return for budgeting purposes. It’s not uncommon for rental agencies to increase the rental amount they would expect to get, in order to win your business. They then lower your expectation, as tenants prove hard to locate.

3) Make sure the property is in acceptable condition:
You have found a great little house that would appear to be getting suitable returns in rent and would appear to be offered at the right price. Excellent! The next thing to do is to get the house thoroughly checked out. The building, electrical and plumbing inspections check all the building and local body permits are in place and get a solicitor to look over the title of the land to check everything is all tiptop. It will cost these things unless you have some great family or friends who owe you a favor, but it is a small price to pay for a piece of mind. Without them, you run the risk of things like, and electrical rewire being needed, replace the roof or the piles of the house or maybe there has been a slow water leak for the last 10 years that has rendered half the flooring unsafe. All these things can cost thousands to fix and all could have been prevented with a bit of due diligence before you purchased the home. If you get the necessary checks and something is found to be wrong, then this can be used to negotiate a lower price or you can simply walk away from the deal.

4) Haggle:
Many people do not like the idea of haggling or bartering to get a good deal. Some are happy to pay the asking price and walk away. The thing to remember with an investment property is, the less you pay, the better the return on your investment, and the less interest you have to pay the bank (if you take out a loan). In real estate, people expect to receive offers that are lower than the asking price, they expect to negotiate with the prospective purchaser and in many cases, they put an inflated asking price for the property because they expect to be knocked down. You have nothing to lose except a few thousand from your home loan. If you have a maximum price that you are willing to pay, then do not go above this. There will be other deals out there, if this one does not suit, then simply move on to the next one.

5) Immerse yourself in the scene:
Information and knowledge is a powerful tool in this game. Read books, newspapers, investor magazines, websites, chat rooms, anything you can that is going to give you tips and advice. Talk to people, ask friends and workmates who you know are involved. From my personal experience, property investors are only too happy to talk to others about their experiences. Most areas have groups or clubs for investors to meet and talk, source these and give it a go. There is no such thing as too much information. It is also a great way to meet others who can help you with certain aspects of the investment game.