You may have heard the benefits of investment property through such old saws as, “Real estate’s the only thing they’re not making any more of,” or, “Only real estate is real.” In the late nineties and the early years of the new millennium, tens of thousands of regular people decided to get involved in investment property.
Other than a source of wealth, and a steady stream of cash into your bank account, what is investment property? What turns regular property into investment property? Before we answer these questions we must address the concept of property as an investment. Property as an investment Investments create value in two different ways. First, they rise (appreciate) in value. Second, they provide a stream of income. Optimally, an investment does both.
Property can both appreciate in value and provide revenue. A great example is a rented investment condominium or apartment. Many property investors use income from rents to pay the mortgage on the property and pocket the difference as income. Obviously, there are some sorts of investment property that don’t generate revenue. An undeveloped patch of land, or a defunct farm, is a good example of this. Some property investors hold untenanted homes. In this case, the only value increase comes from rising property values, and are only realized on the sale of the investment property.
Definition of investment property This leads to the definition of investment property: investment property is any property purchased for the primary purpose of increasing in value. If you live in your house it is not investment property, even though it may rise in value. If you buy a summer home then it’s not an investment property. Investment property is purchased with the expectation that it will bring income to the buyer. Investment property vs. stock market investments Many people prefer the tangibility of investment property to the abstractions of stocks or bonds.
Investment property is an asset you have a great deal of control over. Investment property can be fixed up, repaired, even improved – for added property value. Stocks on the other hand fluctuate in value, and the only control the stockholder has is to vote on motions proposed by the board. An investor can drive by investment property and see how it’s doing. A stock investor must content herself with the company’s balance sheet and hope that executive staff are not misleading her with phony numbers.
Finally, investment property can be financed with mortgages. These loans are frequently far easier to acquire than other types of loans as they are secured by the investment property. Stock investors who wish to leverage their investments must take out margin loans, which have high interest rates and can be called by the lender at virtually any time. In the long run, investment property outperforms the stock market (as a class). Property investment isn’t for everyone, however. It is a risky proposition and highly local. Property investment is the antithesis of diversification, so any investment in property should be made as a portion of your total asset allocation.