So you're looking to invest in property, but it all seems so complicated. It’s not as simple as Monopoly where all you have to do is buy a lot of green houses and gradually replace them with red ones. Now it's time to put away the Monopoly board and start dealing in real money; we’ll help you find out where to begin.
To be a property investor, you first need to understand the various types of properties for sale. From there, you can determine what kind of investment best suits your particular interests.
Income and non-income generating property
The first difference you need to understand is between income and non-income generating properties. Income refers to whether or not you receive rent from a tenant. Non-income producing properties still represent an investment, but it's in the form of capital you receive upon sale of the property, rather than any monthly income it may generate.
Leonard Baron advises first-time property investors against buying non-income generating properties, claiming that there is an “opportunity cost” to having your capital invested in a property that isn't generating income. This opportunity cost often amounts to more than you will gain from selling the property, even if it appreciates in value.
Residential, retail, industrial and commercial properties
Now for the different types of income-producing properties you can invest in.
- Residential property: This will be the one you’re most familiar with, as it's likely you'll have lived in one yourself. These are houses or apartments housing an occupant or group of occupants. Your source of income in this case will be the tenant.
This is usually considered a sound investment, as people will always require places to live; but your returns are heavily dependent on the type and location of the property. For example, investing too heavily in luxury apartments will make you more vulnerable to fluctuations in the economy.
- Industrial property: This is the bread and butter of your average investor, according to Investopedia, due to low operating costs and less need for micro-management. Industrial properties could be used for storage, manufacturing, research and development or other such services, and your source of income will be the customers who make use of the services provided. Industrial properties can provide significant return on investment due to multiple revenue streams.
- Retail property: Your source of income is a percentage of profits generated by retailers occupying the property, with shopping malls being the classic example. Retail properties are typically either grocery-anchored or food-anchored, which means that the presence of a large grocery store or restaurant within the facility will serve as the primary draw-card for customers. There can be other types of anchors though, such as a retail space built around a gym.
Either way, retail properties can be risky due to their dependency on the demand for consumer products, which in turn is dependent on the state of the economy. On the upside, retailers are less likely to relocate than residential or commercial tenants.
- Commercial property: These are office buildings usually leased out to companies and small business owners. Commercial properties tend to be close to city-centres, making them extremely valuable. On the other hand, they have high operating costs and are vulnerable to fluctuations in the economy as there will be lower demand for workers when times are bad. When times are good though, commercial property is a reliable source of income.
So now you know the different types of property, here are some other things you should keep in mind before investing in your first property.
- Location is everything, regardless of what property you buy. Residential properties fare better when located in safe areas, near to public services or close to business centers and public transport if aimed at working individuals rather than families. Industrial properties need to be positioned close to transport centers. Retail spaces fare best in prosperous neighbourhoods. Commercial spaces naturally need to be located in business hubs.
- Never purchase property in your private capacity, as doing so will make you a target for law suits if anything goes wrong. Joshua Kennon advises employing a legal structure known as a Limited Liability Company, or LLC for short.
If you have any other questions regarding a buying or selling property, be sure to contact us at Tepilo for advice.
Disclaimer: The information provided is for general information purposes. It does not constitute investment advice nor does it take account of your own particular circumstances. If you require any advice on investments, you should contact a financial or other professional advisor.