Both new and experienced buy-to-let landlords will find themselves, at times, torn between which property to buy. While there are numerous factors for landlords to consider before making their final decision, the buy-to-let property is an investment, first and foremost. Therefore, the long-term return on investment on their property purchase should be a primary consideration of private landlords.
What is the best type of investment property in the real estate market? If you're looking for a straightforward answer, you won't find one.
In order to determine the answer to that real estate question, you will first need to learn about the advantages and disadvantages of each type of investment property in order to decide on the best type of investment property for your particular needs and preferences as a real estate investor.
There are three main types of property that people look to invest in vacant land, commercial or industrial property, and residential property.
Each type of real estate investment has its pros and cons. Still, for anyone looking to build wealth, I strongly recommended you make the residential property the basis of your initial portfolio.
A residential portfolio not only offers the best market growth (over the recent decades), but it also provides the best rental stability. It is, however, important to understand the other main types of properties as they may be something you might want to delve into later down the line.
There are many different types of property investment to choose from and ensuring you have the right property for your investment strategy is a tough choice to start with, especially if you have the funds but are a novice when it comes to investing.
We have listed a number of our recommended property investment types with an explanation on perhaps why they may or may not suit your investment strategy.
Off Plan Investing
Purchasing before building works start can help achieve a huge discount on the initial property purchase price. However, this can be often considered as risky and would be subject to do your due diligence on the developer.
The incentives for buying off-plan are huge, you can often get discounts as much as 50% lower than the price paid on completion, and you get to watch the build grow in the knowledge that your property will be worth so much more when it's done.
Whether you then flip on completion and make a quick buck, if you have the cash and you are prepared to wait, then this riskier strategy can potentially boost your portfolio with unprecedented returns. Get the timing or investment wrong, and it could also have a less favourable outcome.
We like to think of it as Vegas-style investing due to the risk involved, but a way of lessening that risk would be investing through developers we know and trust so that you feel confident in getting your monies worth.
Showhomes offer a slice of luxury within your investment portfolio. We all know how they work; the Showhome is used as a masterpiece fitted with fixtures and fittings by developers to show potential house buyers around.
The developer sells these showhomes (fully fitted) with a discount to investors and then rents back at the market rate during the time of their stay (usually until all homes are sold within their development). Once they are done, you get a perfectly decorated home ready to live in at a snip at its usual cost.
With city-centre apartments ever more appealing and quiet coastal & rural retreats as popular as ever as alternatives to hotels and bed & breakfast accommodation, you can now earn the same price in a week for your home than you would usually make in a month.
Best Type of Investment Property
When trying to determine the best type of investment property, the answer will always be relative based on the specific situation of the real estate investor who's asking the question. There are many things to be taken into consideration when trying to determine the best type of investment property for your investment goals and plans. Your financial situation, your short-term and long-term investment goals, and your knowledge of the real estate market are some of the most important factors that will greatly affect your decision with regards to the best type of investment property in your case.
While some investors plan their real estate investment strategy around long-term profits and property appreciation, others choose to invest in an investment property with the hopes of making profits at the soonest opportunity. And while some real estate investors' financial situation allows them to invest in a property with all cash, others might have to rely on a mortgage to finance their investment property, limiting their options and requiring them to plan their finances and profits accordingly.
So, based on each real estate investor's preferences and preferred investment strategy, you can determine the best type of investment property.
Below is a list of each type of investment property, its advantages and disadvantages, and what makes it optimal for the different types of real estate investments.
While the idea of owning a rental property and becoming a landlord might lead some real estate investors to believe that a rental property will immediately result in them earning a passive rental income, in reality, that is rarely the case.
A rental property might be the best type of investment property, but only in the long run. This is because most of the rental income that you will be making off of your rental property will be going towards your mortgage payments, property tax, maintenance costs, and possibly professional property management.
Some real estate investors might consider a rental property that could generate $1,500/month in rental income, for example, thinking that they can immediately quit their day job and solely live off the passive rental income that they are making. But the fact is, most rental properties have very high running costs associated with them, especially if you've taken a mortgage loan to finance your purchase, which is the case for most real estate investors.
If you take that $1,500/month rental income from your income property, and you discount all the expenses that you would have to pay to keep the rental property running, you might end up with something close to $150-$200 of cash flow, or profit, each month. This is after paying your mortgage payments, taxes, property management fees, and property maintenance, and you will still need to save some money for any unexpected home repairs to keep your investment property in good shape and your tenants happy.
You might be thinking: "Why would anyone invest in a rental property then?"
The answer is simple: For the long-term benefits.
In the long run, and after you've paid off your mortgage, which makes up the largest portion of your rental property expenses, you will have finally reached a point where your investment property is making the profit that you've always dreamed of.
The best part is that while it may take you 15-30 years based on your type of mortgage before you reach that point, you won't be the one who's actually paid off the mortgage, your tenants will have paid it through rental income. Additionally, at this point, your property will probably have appreciated, and its value will have increased, allowing you to sell it for a hefty amount without any further costs, which can earn you a very high profit.
Vacant land can be considered the best type of investment property for a large number of real estate investors. This is due to the typically low prices of vacant lands and the almost non-existent running costs of owning vacant land.
Typically, the only expense of owning land would be in property tax. This tax, however, is very low and manageable. Nevertheless, in the long-term this tax might mount up to thousands of dollars, so you will have to make sure that the profit you're making out of selling the land is higher than the price at which you've bought it as well as the costs of taxes that you've paid. Additionally, it is possible in many cases to make a slight profit from the land by either using it for farming or even renting it out to hunters.
The major downside of investing in vacant land is the difficulty of finding a lender who would be willing to give you a loan for your investment. This means that the vacant land market is mostly a cash-only market, and you will need to save up a large amount of money in order to make your investment.
Finally, to make the most out of your vacant land investment, you will need to have great knowledge of the market and the area and be able to forecast the area's development and make sure that in the long run this vacant land's value will increase and there will be some buyers interested in using the land for real estate development projects.
The final type of investment property, which is considered as the best type of investment property by a large number of real estate investors, is properties that are in bad shape and need renovation. Fix-and-flip properties are among the best short-term investments in the real estate market. They involve the process of purchasing a real estate property that is in bad shape, renovating or fixing it, and selling it back at a higher price-point.
While fix-and-flips are among the best types of investment property for making very high short-term profits, they usually have very high costs associated with them and require extensive planning to pull off.
Although fix-and-flip properties generally have very low price-points due to the sub-optimal conditions of the property, several costs will arise after you've purchased the property. This includes the costs of renovating and repairing the real estate property in order to get it back into a habitable and attractive condition, in addition to several other costs such as property inspection, which are all crucial to the success of your real estate investment.
Finally, fix-and-flip properties have the highest rate of unexpected costs and expenses that may arise during the renovation as well as during the closing processes. Thus, a real estate investor will need to get the property inspected at the different stages of the investment in order to avoid unexpected expenses which should all be taken into consideration when trying to plan your investment and its expenses.
What to look for in a good investment property
Look for a rental property that's within your means both budget- and effort-wise. Since the recession, smaller buyers have taken more of an interest in investment properties. Many properties are priced significantly lower than they were pre-recession.
A big part of your selection criteria for an investment property will come down to what type of property will pay off the most in the long run. Although buying the largest home on the block of the house with the state-of-the-art movie theatre in the basement may appeal to your sensibilities, neither makes much sense as an investment purchase.
As an investor, you need to think beyond your personal preferences and consider what will appeal to buyers. Not every future buyer or renter will want to incur the cost of that theatre, and the largest home on the block is likely already overvalued for the neighbourhood, so there's not much room for profit.
Also, be sure to keep the overall condition of the property in mind. Although looking for distressed real estate to invest in is common, it's important to make sure it doesn't require a complete overhaul. Preferably, it will only need a few modest repairs. You don't want to wind up spending $50,000 on a property that won't let you recoup your investment costs.
Low prices often lure people, but the costs of things like a new furnace or roof add up. Some real estate agents suggest bringing a contractor along to find out exactly what's needed to get the property up to market value.
Why location matters in an investment property
Where you buy an investment property can make a huge difference. It helps if the home is situated in a desirable neighbourhood or one that's on the verge of being an up-and-coming community.
It's also important that the property's location will attract the type of buyers or renters you'd like. When deciding which area to invest in, first decide whether you're more interested in appreciation or steady monthly cash flow. This will help shape whether you plan to keep the property as a rental or resell it.
Also, be mindful of the neighbourhood's buying patterns. Is it primarily a homeowner or rental community? Is there a shortage of either that would sway you one way or another?
Look for the property's appreciation potential through signs of growth in the neighbourhood. A good mix of retail establishments, such as places to shop and dine, is a good sign even if those businesses are planned but not yet built.
Although most people purchase an investment property in their local market, it's not unheard of to invest out of state. Just be sure to familiarise yourself with the real estate market there if you do. One of the advantages of investing elsewhere is that you can find more affordable real estate by not limiting yourself to one geographic region.
Focus on residential property as your primary form of wealth building. It not only historically offers the best market growth, but it also provides the best rental stability.
Later you may wish to build a commercial portfolio separately. Do this when your equity and cash flow are in a strong position.
Remember, stick to your plan, and you will achieve what you need to enjoy life. Don't get sidetracked with other forms of investment until you've built a strong foundation of residential properties. If you're still unsure which type of investment property you want to get involved with
There isn't a single way to determine the best type of investment property. The number of factors that play a role in the suitability of a real estate property for investment is numerous, and they can only be assessed and determined by the individual real estate investor who's looking to buy an investment property.
Before entering a private real estate deal, extra care must be taken to ensure all the risks are understood, and all the details are gone over with a lawyer. If you do decide on buying a rental property, remember that it is a long-term investment and generally will only generate a positive income after the rental mortgage is paid off.
Some keys to owning a rental property:
- Keep extra cash aside for emergencies, renovations, special assessments or vacancies;
- Treat it like a small personal business and keep all your applicable receipt;
- Hire an accountant, lawyer and realtor to help you keep up with all the changing rules.
The best way to incorporate real estate into your investment portfolio will depend on your situation and risk tolerance.