What is an Investment Property?
An investment property can be a long-term endeavour, such as an apartment building, or an intended short-term investment in the case of buy – renovate- sell at a profit
An investment property is like any other investment: the goal is to generate a profit. In real estate, this is achieved through income (rent, for example) or through a profitable resale. The way in which a 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 its highest and best use. Certain properties can be developed in more than one way (commercially zoned property, for example) and investors can maximize returns by determining the highest and best use.
The benefits of an Investment Property
- Property can be less volatile than shares or other investments
- You can earn rental income and benefit from capital growth (if your property increases in value over time)
- If you take out a loan to purchase an investment property, interest on the loan and most property expenses can be offset against rental income, for tax purposes
- You are investing in something you can see and touch
The pitfalls of owning an Investment Property
- Rental income may not cover your mortgage payments or other expenses so you may have to use other money to cover these costs
- An increase in interest rates will increase your repayments and decrease your disposable income
- There may be periods of time where you don’t have a tenant and will have to cover all costs yourself
- You can’t sell off a bedroom if you need to access some cash in a hurry
- If property investment is your major investment you may have little or no diversification
- If the value of the property goes down you could end up owing more than the property is worth, this is known as negative equity
- There are very high entry and exit costs such as stamp duty, legal fees and real estate agent’s fees