Investment Property Types
It involves real asset investment for returns through renting or resale across various classes
What Is an Investment Property?
Investment property is a certain class of investment of real assets, such as properties, invested by individuals or corporations to earn a return on investment (ROI) through renting the property, reselling the property, or even both if the means is feasible.
Real estate, as in land and building, typically tends to be appreciated if maintained well, making it a viable investment. Therefore, investors who invest in investment property invest either long-term or short-term.
Long-term investors usually indulge in renting the property to potential tenants for a monthly payment. However, investors who like to take a short-term approach typically avoid engaging in rental and choose to flip instead.
Flipping is the process where the asset is acquired, renovated, and sold in a short period of time to realize a quick gain from the increased asset market price due to additional work done on the asset.
Real assets in which investment properties are focused don't stay fixated on one class of property, i.e., real estate, but rather consist of an array of asset classes such as fine arts, securities, collections, and land. Diversifying the portfolio is a great investment strategy.
Investment properties are not the primary residence. Primary residences or second homes are not considered to be investments in monetary terms since they generate no income. But if the property is engaged in some economic activity, then it is safe to class it as an investment.
Key Takeaways
- Investment property involves real asset investment for returns through renting or resale across various classes, such as real estate and securities.
- Two main types of approaches exist: traditional (active, higher risk) with options like land and residential properties and alternative (passive, lower risk) involving REITs and crowdfunding.
- Traditional options like residential and commercial properties have pros and cons as they offer high returns but involve significant down payment and maintenance costs.
- Alternative options like REITs and crowdfunding also have their own pros and cons as they offer smaller, steady returns for a lower down payment and zero maintenance costs.
Types Of Investment Properties
Investment property has a wide range of opportunities, with many choices to choose from. Therefore, knowing what type of investment opportunities are there is essential to a potential investor, as each has its pros and cons influencing potential investors’ decisions.
There are two generic types that are available to an investor who seeks to invest in the real estate sector. These options have their own characteristics, benefiting the investor based on the economic activity planned to perform in the invested property. They are simply categorized as:
- Primary Projects: Projects that are under construction or early planning but are available for sale directly from the developers.
- Secondary Projects: Finished projects that are available for sale from the previous owners of the properties.
Just knowing what these types are doesn’t properly cut the cake for us, am I right? Let us explore more briefly what opportunities these two types of property investment have to offer an investor and for whom these properties are meant. Now, shall we?
| Primary Projects | Secondary Projects |
|---|---|
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Primary projects are the properties that are still in the process of early planning or work-in-progress (construction) and an investor buys directly from the Developers. Primary properties have no previous owners as the dealings are with the developers themselves. Investing in primary projects can be either in:
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Secondary projects are those properties that were previously owned by an owner who is looking for a potential buyer to sell the property for a profit. Here, the dealings are not with the developers directly but rather done with the external owners who already bought from the developers or from secondary markets. These properties are already occupied by the tenants of the previous owner and can be seen on the market for rental or sale purposes. |
Advantages of investing in primary projects are:
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Advantages of investing in secondary projects are:
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Disadvantages of investing in primary projects are:
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Disadvantages of investing in secondary projects are:
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When looking into the location, both types of projects don't need to segregate themselves; in reality, both project types can be seen together in one location. Typically, secondary projects reside in established neighborhoods along with a few not-so-established areas.
Similarly, primary projects can also be seen in well-established locations (these can be pricey). Primary projects can also be seen developing in large plots of land by developers building large residential and commercial complexes where the population is yet to move in.
Tip
Many factors influence the market conditions and it is best practice for investors who seek primary projects to utilize escrow accounts to safeguard their investments. This can prevent heavy loss in case the developer decides to abandon the project due to unfavorable market conditions.
Investment Property Approaches
In a broader perspective of approaching property investment, they can be further classified into two groups based on the nature of asset procurement. The table below classifies the investment approach in simple terms:
| Traditional Approach | Alternative Approach |
|---|---|
| The traditional approach is an active approach taken by investors who invest in actual physical properties such as land and buildings. | An alternative approach is a passive approach taken by investors who don't have the capability or preference to invest in physical properties. |
| The traditional approach allows investors a high returns at the expense of high risk, heavy upfront payment, and heavy maintenance. | The alternative approach allows investors to invest in investment properties with fewer financial barriers for a low return due to low risk, no maintenance, and less cash upfront. |
The traditional approach indulges in physical assets:
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Some of the popular available alternative options are:
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Getting a glimpse of the broad classification is not enough; we have to know what each approach has to offer, as some outweigh others based on investor preference and risk tolerance. We need to know what is the catch with each investment.
So, future investors, do you want to know what each investment property has to offer? Let's dive in. Below, we shall discuss the approach to traditional property investment:
Land
Biologically, the land is a solid terrestrial surface on Earth that is not submerged by water. The land is everywhere (okay, 30% of the earth), but in an economic context, it is the Earth’s surface that possesses economic capacity, whose ownership is defined by fixed spatial boundaries.
The majority of human activities operate on land. Such potential land offers to all sorts of businesses and livelihoods. Therefore, land appreciates over time depending on how well-developed and maintained the land is.
Broadly, there are two types of land whose value would be defined by their characteristics. The investors would choose the type of land based on what they intend to do on the land. The general types of land that are available to an investor in any part of the world are as follows:
- Undeveloped (Raw) land: These are the lands that no human civilization has touched, i.e., no roads or any sort of construction. These lands are cheap to acquire and highly cost-effective when developing appropriate businesses on them, such as agriculture.
- Developed land: These are those lands that have some level of physical development on them, such as roads, buildings, farms, parks, etc. These developments appreciate the value of such lands, resulting in an increased price tag to acquire the ownership.
| Pros | Cons |
|---|---|
| Raw lands are cheaper to acquire. | Developed lands are expensive to acquire and maintain as developed lands as there are physical projects on top of such lands. |
| Raw lands are easy to acquire.Raw lands are easy to acquire. | Developed lands require effort to acquire. |
| Inexpensive maintenance. | Less available tax benefits unlike investing in properties with a mortgage. |
| Variety of available strategies to benefit, such as buy and hold, lease, or even flip. | Less available spots due to zoning by regional legislature and more waiting time to incur a turnover. |
Residential Properties
Residential properties are the infrastructure where the populace resides. These properties are used for private use by the dwellers for their basic needs, i.e., shelter, either by owning the property or renting the property from the landlord/owner.
Residential properties are the epitome of real estate. When an ordinary person hears about real estate, they normally will think about residential properties. But what makes a residential property attractive? We hear you say.
Well, long-term investors who are exploring investment properties usually opt for residential properties as they intend to rent them to potential tenants. This makes residential properties a lucrative long-term investment.
Residential properties do seem to be an appealing investment option, but it is not everyone’s cup of tea. Why? For starters, it needs an appalling upfront investment just to procure the asset void of all other expenses like property tax and such.
Then come maintenance costs as tenants want to live in a comfortable environment, and it is the management’s responsibility to maintain a healthy environment, such as repairing and cleaning, if they want the tenants to stay longer.
Therefore, it requires a heavy load of cash investment and poses a high risk, especially when many factors such as neighborhood, housing space, and other public facilities keep away potential tenants. But if the opportunity is lucrative, residential properties can be highly lucrative.
Common ways investors facilitate the investment are long-term rental, vacation rental, flipping (selling after renovating the property), micro-flipping (selling typically soon after acquisition), and Accessory Dwelling Unit (ADU rents out a portion of the property to a tenant).
Common residential properties worldwide are single-family homes, condominiums, apartments, skyscrapers, townhomes, penthouses, mansions, and so on.
Now let us explore the pros and cons of investing in residential properties:
| Pros | Cons |
|---|---|
| Highly lucrative if you know what you are doing. | Highly expensive. |
| Properties such as land and buildings’ value appreciate over time when taken care of properly. | The mundane task of maintaining the asset is both costly and time-consuming. |
| According to the country’s law, possible tax advantages in owning real estate. | Investing in real estate is not a very liquid investment. |
Commercial Properties
Commercial properties are those infrastructures meant for commercial entities to undertake economic activities. These properties allow business to conduct their operations either by owning them or renting them from a landlord/owner.
Commercial properties, similar to residential properties, are also focused on maintaining and renting the properties to the interest tenants. The only difference is that the tenants here are businesses that rent the property for their business use, such as office space, shops, etc.
The functionality is the same as that of the residential; the only difference is the intended target audience. Due to this, commercial properties charge higher than residential properties as the business invests in the rented space, whereas the residential property is used as a home.
Note
These properties can be standalone properties or a segment of a residential property, also known as mixed property, as both private dwellers and commercial entities would use their respective segments of the property. Investors can opt to diversify portfolios by investing in mixed properties, gaining the best of both worlds after accounting for their drawbacks.
Let us explore the pros and cons that challenge commercial properties:
| Pros | Cons |
|---|---|
| Yield higher returns than residential properties. | Increase in stakeholders of the property. The commercial properties should consider their stance with the current tenants and the public. |
| The value of the commercial property increases as the businesses excel in their venture. | Increased time and paperwork with tenant businesses compared to residential properties since there is no saying the business will succeed. |
| Maintenance may not be a risky investment compared to residential properties. | Increased public damage controls and precautions as compared to the residential properties. |
Now, why don't we explore some of the alternative approaches for property investments as well? Below explores the two options we have mentioned before:
Real Estate Investment Trusts (REITs)
Usually defined as a low capital option that allows investors per share acquisition of an investment. Trustees who hold and manage multiple real estate-related investments entertain such an option.
These trustees are generally publicly traded companies that have expertise in the real estate sector and can be found trading in stock exchanges such as NYSE and LSE as they are highly specialized and involved in high capital-intensive investments such as malls and hospitals.
Due to their high specialty and sector expertise, these qualities allow the trustee to gain the trust and confidence of potential and current investors who trust the company in managing their investments to increase their wealth.
These publicly traded companies offer alternative options (REITs) to those investors who can’t afford such high-capital assets; such investors can be seen approaching REITs to buy shares using low capital, earning passive ROI for a low-risk venture.
To understand whether Real Estate Investment Trusts are for you, why don't we weigh the REITs' pros and cons below:
| Pros | Cons |
|---|---|
| Earn the return in the comfort of your home without even having to see, manage, or even own the property yourself. | Like any other liquid security, investors have little control over the investment. |
| Earn small, steady, low-risk returns over a long period. | Assets that are REITs are taxed higher than any other qualifying dividends, depending on country tax laws. |
| Flexibility and diversification of the portfolio with other forms of liquid securities such as stocks. | Investors who are looking for short-term investment will not benefit as REITs are the best long-term investment option. |
Real Estate Crowdfunding
Real estate Crowdfunding is an investment approach similar to that of debentures (seeking public), but investors hold investment shares, where a crowd invests in the company's project via a real estate-specific equity crowdfunding platform.
Thus allowing companies to gain access to a whole new source of fresh funding to finance the projects of the company by connecting and networking with potential investors.
This approach takes the form of a passive investment, similar functionality to mutual funds, which focuses on procuring and pooling funds and investments of different investors and investing into a single real estate investment such as Real Estate Investment Trusts (REITs).
This allows investors who can't afford to take the traditional way or acquire a share in REITs by themselves. Thus, such crowdfunding allows investors to connect on a real estate social networking platform, typically online, and pool their resources to invest.
As always, even this investment approach has its own potential and drawbacks. Let us explore some to understand its viable weightage:
| Pros | Cons |
|---|---|
| Open doors to many investment opportunities by socializing with the investor network. | Some platforms require a certain income threshold to be deemed eligible to enter, reducing the potential risk of investors bailing out due to insufficient funds. |
| A great option for diversification of liquid investment for less upfront investment. | Platforms can charge additional fees for their services. |
| Little effort is needed, and less mundane procedures are due to online processes. | Just like any dividends, real estate crowdfunding can also be taxed based on country tax laws. |
Choose The Right Investment Property
Before we bid farewell to our readers, or shall we say “future investors” in the investment arena? Choosing the right investment property matters; after all, you are what you choose.
- “Are you a conservative risk taker?”
- “Are you a moderate risk taker?”
- “Or are you a high-risk taker?”
Either way, an appropriate investment opportunity is tailored to your preference, but you need to know where the opportunity lies.
Procuring, investing, and diversifying are the elements an investor of any caliber would engage in, and the same applies to the investment property.
Consider the available financial options for the investment, the credit score, the risk tolerance, the downpayment, the tax obligations, and available tax advantages, consult the professionals in the field, and re-evaluate the overall strategy for making a profitable return from the investment.
In the end, there is no age limit for learning; educate yourself on what you are doing and re-evaluate your steps for efficient results. After that, you are set for your journey in the investment field. Bon Voyage!
Investment Property FAQs
Investment properties are infrastructure that is invested by individuals or corporations to make a profit (ROI) by letting the property be rented, resold, or even both. Investment properties can be buildings, artificial turfs, etc.
Land, residential properties, and commercial properties are investment properties prime examples.
Due to heavy capital consumption, commercial properties usually receive the highest ROI as compared to other investment properties for the risk taken.
The go-to accounting standard dealing with property investment is IAS 40 “Investment Property” since it governs the invested properties' rental and capital appreciation.
Location, negative cashflows, and high vacancies are some of the biggest risk factors that drive properties' market value.
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