Buyers > Types of Property

Types of Investment Property (Part One)

Finding the right investment property is as personal as choosing which investments to make on the stock market; there are many types of property investment to suit differing investment strategies and styles. In this, the first of two articles on investment choices, we review the typical starter investments.

You don't have to be a property developer to invest in Real Estate; in fact, if you own a home you have already invested in Real Estate. If you have a mortgage, you have borrowed money to finance your investment and you expect to repay the loan over the period you own the property or when you sell it. Nobody buys a home with the expectation that they will lose money on it.

Despite the large numbers of people owning their own homes, very few of these homeowners consider themselves property investors. Homeowners perceive it to be an enormous leap to go from home ownership to ownership of a property expressly for the purpose of generating income or capital appreciation.

Like any investment, there are risks associated with property investment. There are also plenty of people that have made unwise investments and lost all of their assets through Real Estate deals that went bad. Yet, for every bad deal, there are possibly thousands of property investments that have been profitable. The key, as with any investment, is to do your research and invest wisely. Just as a stockbroker can help you invest wisely in the stock market, a Home Investor Specialist™ can provide you with help in selecting the right investment property based upon your own goals and objectives.

The Home or Primary Residence

The most basic form of property investment is the primary residence, or the home you live in. Although many homeowners do not think of their home as an investment, for many people, property appreciation can result in the most significant source of investment wealth creation. Therefore, we recommend anyone choosing a new home to consider its investment potential as one of the major selection criteria. (See also buying).

Second Homes

Considered the most common type of property investment after the primary home, a second home frequently serves as a family getaway; but it can readily be converted into a rental property when the family has grown.

When purchasing a second home, consider the resale appeal of the home within the area you have selected to buy. A small cottage may be affordable but may limit your ability to sell it in the future unless you plan to remodel it. A larger family home may make a better investment since it offers a wider potential market for buyers.

It is also worth noting the shifting demographics in the USA. With the imminent retirement of Baby Boomers, single story ranch properties located in very scenic areas are likely to increase in demand (and therefore value) over the next ten to twenty years. Consider lakefront, golf-course, or panoramic vista homes as being highly desirable (even more so than at present).

Dual-Use Holiday Homes

Second homes located in desirable tourist areas can be used as both a vacation getaway and rental property. (Seek advice from your Home Investor Specialist or tax advisor on how many days you can use the property for "maintenance" purposes in order to minimize your tax liabilities).

Rental Homes

Rental property is typically the first real investment that is expressly made for the purpose of income generation and/or capital appreciation. Consequently, the rules for property selection change according to the priority of the investor (capital appreciation or rental income).

There are many differing opinions as to where it is best to invest for generating rental income. Some investors advocate investing in low cost housing in poorer neighborhoods because the investment-to-income ratio is so attractive. Still others suggest investing in upscale rental properties for the combination of income and asset appreciation. Just as no single stock advisor is correct all of the time, there is no single property investment strategy that is ideal for everybody. For example, your choice to buy low-cost housing to rent to poorer families or students might be driven more by charitable motives than by a need to generate a profit from your investment.

If you are looking for rental income out of your investment, then be careful to do your math: at a basic level take the monthly income being generated by the property (or the typical rental in the area if it is not yet rented) and deduct from that your expenses (maintenance, management fees, utilities if included in the rent, property taxes, and your financing costs) to see if the property will generate a positive cash flow (i.e. you have money left over after deducting all of your expenses).

Improvement Property

Buying property to renovate and sell on can be extremely satisfying and very profitable, but it can also be extremely risky. The key to making a profit from renovations is in buying the property at the right price (See also buying). There are probably hundreds of properties in your area that could be substantially improved through some simple remodeling, but making a profit on the project requires the seller to be realistic about the value of the home. Another problem is that you are competing with homebuyers that may simply be looking at the property as a home and not as an investment.

One of the best ways of finding overpriced investment homes is to ask your Home Investor Specialist to provide you with a list of all the homes slightly over your price range that have been on the market for over five months and that have had at least one significant price reduction in that time. These are homes where: the seller is reasonably motivated (because they have agreed to a price change); the Agent is motivated to sell the home (because they risk losing the listing and their commission if it does not sell); and something has prevented the home from selling at the price being asked.

Review each of these properties and drive-by the ones that look appealing on paper. If the property is in a desirable area but lacks curb appeal, consider how easy it might be to change it's appearance. If the property looks attractive from the outside, it may have problems inside that can be easily overcome. Use the services of your Home Investor Specialist to pre-screen potential properties and focus on locating motivated sellers with homes that are in need of a little more than a splash of paint. These sellers are more likely to consider a low offer because they don't want to deal with the "problems" themselves. Don't forget to factor in all your costs to improve the property when making your offer.