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What is an Investment Property and Why Invest in One?

Owning an investment property is one of the most common ways for people to build wealth and financial stability. Property ownership has become a very popular option for many investors, and it is being seen as one of the best investments because it requires relatively low amounts of cash to get started, can be purchased anywhere in the world, provides tax benefits if utilized correctly, and provides the owner with additional passive income.

The term "investment property" can be used loosely to describe all types of real estate properties, including multi-family homes (i.e., duplexes), single family homes (i.e., condos), mixed use properties (i.e., properties that are part residence and part commercial), and even mobile homes (i.e., trailers) as long as the property generates income for the owner.

Investment properties can be used as places of residence or as a place to generate rental income from tenants. The beauty of investment properties is that as long as they are generating income for their owners, they can be used as long-term investment vehicles.

Owning an investment property has become very popular because it offers the owner a great deal of flexibility and autonomy with their wealth. This is because real estate is considered one of the most valuable asset classes, which requires relatively less capital to purchase compared to other types of investments.

Investment properties are often purchased with a combination of debt and cash, where the borrower uses equity in their current home (i.e., primary residence), which has been paid off, to secure acquisition of an investment property. In most cases, even when you use your primary residence as collateral for a loan on an investment property, the interest rate remains relatively low because these loans are secured by a valuable asset.

When investing in an investment property, the costs associated with the purchase are significantly lower than what you would have to pay when buying shares in a company or mutual fund. The total cost for purchasing an investment property that generates income is often referred to as "cash-on-cash return" because it reflects all of the money you have spent on the property after making some adjustments for appreciation and depreciation.

Cash-on-cash return is calculated by taking your purchase price and subtracting what it costs to operate and maintain the property every month, including all of your monthly outflows toward servicing debt and expenses such as real estate taxes, utilities, homeowner's association fees, and insurance.

The cash-on-cash return is then divided by your total capital outlay to determine the amount of income that is generated by the property each month... in most cases, an investment property will generate positive monthly cash flow because its expenses can be covered with the rent collected from tenants.

So what are some examples of how people use investment properties?

Well, for starters, it is very common to purchase an investment property as a way to generate additional passive income. In fact, there are currently millions of people who rely on their real estate investments (i.e., single family homes and multi-family units) to cover the cost of living every month because they have tenants paying off their mortgages for them.
But that's not the only way to benefit from an investment property. Some people purchase multi-family units to generate income on a monthly basis while also utilizing these properties as places of residence. For example, some investors are able to live in one unit while collecting rent from their tenants in another unit. This is why it is often called "house hacking" because you are essentially able to benefit from having a house for yourself and generating rental income with another unit.
Additionally, some people purchase multiple investment properties in the same market so that they can take advantage of economies of scale by consolidating their management efforts across different locations (i.e., deal syndication).
However, it is important to understand that investment properties come with a host of tax implications that you must consider as an investor. This includes the potential for higher tax rates because these properties are usually generating positive cash flow on a monthly basis.
In the Philippines, investment properties are treated as capital assets and must be depreciated over a period of 27.5 years or up to 41 years depending on the type of property that is being held. If you plan to hold an investment property for less than one year, then depreciation benefits may not apply and the full cost must be written off in the year when it was purchased.
In other words, when purchasing investment property, it is critical to work with a real estate agent who understands the Philippine tax code because this person can help you structure your transaction in order to minimize the taxes that you pay on your long-term gains.
If you are thinking about investing in an investment property, then take the time to understand how it can benefit your overall financial circumstances and what you need to know before buying. The more education that you have as a real estate investor, the better prepared you will be for making wise investment decisions so that you can grow your net worth over time.

Why You Should View Your Investment Property as a Business

A lot of people see investment property as a form of business, and that's because it is. In fact, the same strategies you would use to open up a store or restaurant can be applied to residential real estate.

- You need to have a location. When you purchase an investment property, you are buying a business license from the government. This means that you need to make sure you can operate your business in this location.

- Know your target customers, know the value of your products, and reevaluate these numbers regularly. Your property is a product which needs to be worth enough for customers to pay for it. Reevaluate the price every so often with comparable properties nearby to ensure you're still hitting the right target.

- Know your competitors and what they're offering to customers, as well as their prices. This will help you strategize how to set your price point and win.

- Don't forget about customer service! It's not just about having a great product; it's also about repairs and timing those repairs. Customers will remember if they call you and get put off for a few weeks. Remember, one unhappy costumer could mean your business isn't worth keeping.

- Finally, know when to let go of a failed location or product. You can own a great property that's in the wrong part of town, or it may be time to sell your property because you're not getting the return on investment that you should be. Sometimes it's time to cut your losses and move onto something else.

Investing in real estate has long been a preferred method for people who are looking to increase their wealth over time. After all, this is one of the very few investments types where individuals can actually own their investments and derive income from them.

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However, like any other form of investment , there are also a number of risks involved with investing in real estate . This is why it is very important for investors to understand these risks so that they can better protect themselves against such risk factors.

Here are some of the more prominent risk factors associated with investing in real estate:

1. Lack of Liquidity – Investing in real estate is a very illiquid form of investment. This means that it can be difficult for investors to convert their investments into cash without having to suffer losses . In addition, due to the fact that real estate investments tend to be large and expensive, they are not easily sold when investors need to raise cash quickly.

2. Price Volatility – Like other real assets, the value of real estates are subject to fluctuation when it comes to supply and demand . As a result, when demand for real estate decreases , its prices can also fall significantly in turn causing serious financial problems for homeowners who have invested their money in these properties.

3. Regulatory Risk – There is also a high regulatory risk when it comes to investing in real estate . This is due to the fact that there are numerous state and federal laws governing real estate transactions which can cause problems for investors. Currently, the majority of these laws tend to favor buyers over sellers . As a result, there is always the possibility that these regulations can be changed in favor of sellers at some point in the future.

4. Competition – Related to regulatory risk, real estate investors are also subject to increased competition due to the fact that the real estate market is highly regulated. This means that there will always be other individuals and companies trying to purchase or sell properties which can put some serious pressure on real estate investors.

5. Risks Associated with Location – When it comes to investing in real estate , location can play a very important role in influencing potential rates of return . For instance, if you purchase a property located in an area where there is not much demand or foot traffic, chances are that your property will remain empty for a very long time. This will inevitably lead to lower rates of return . Of course, the opposite is also true. If you invest in a property in an area with high demand , it can potentially increase your potential rates of return .

6. Competition from Alternatives – For many people, investing in real estate can be very risky because there are other options that can yield very high rates of return . For instance, investing in blue chip companies like Apple or Microsoft can be much less risky than investing in real estate because these types of investments offer liquidity and low risk.

7. Less Control – lastly, investors also have limited control over the management of their investment properties . This is especially problematic for real estate investors who do not live near their properties and cannot visit them as easily as they would like. When you invest your money in a property, you will be forced to work with the management company that is currently handling those properties .

Even though investing in real estate offers numerous benefits over other types of investments like stocks or mutual funds , it is still subject to numerous risk factors that may make it difficult for some investors to allocate their funds in this manner. Therefore, before investing in real estate , it is very important to conduct your own research and carefully examine any potential investment property.

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