In the property market, it is common to buy and sell real estate to make money. But some are buying a property in the hopes of making a return on investment through rental income or future resale of the real estate, or both.
If this is your plan, you are looking for an investment property. But what does this technical term exactly mean? According to the International Accounting Standards, an investment property is a property—such as land or building—owned with the purpose of earning rental income or capital appreciation. The same standards enumerate the following as qualified investment property:
- land kept for long-term capital appreciation
- land currently held for future use yet to be determined
- building rented out under an operating lease agreement
- property under construction or development for future use as an investment property
You can also buy business properties and convert them into an investment property, changing their primary purpose. Either way, a much-needed capital is required to acquire real estate.
But before putting your money in an investment property, here are some tips you should consider. These can help you make better decisions for your investment.
Set Up Clear Goals
It is advisable for you to gauge properly the benefits and risks of having an investment property before entering this venture. Check first if this kind of investment is suitable to your current financial position. Let this be your compass pointing you the right direction for this investment.
For example, you must ensure that the loan repayments for the investment property will not significantly affect your lifestyle. At the same time, you should evaluate if the risks involved are fine with you. Why? There is a chance that the market value of the investment property may drop, or the interest rates will increase markedly.
Study the Property Market First
It would be beneficial for you if you conduct your own market research first so you can weigh your options. Remember there is a lot to consider when buying an investment property. For example, you have to pick if you are buying an apartment, a house, or a commercial building, alongside its location. At the same time, you need to calculate how much loan you can borrow from the bank.
You also need to look into the potential of the property for capital growth, how much your rental income will be, and the related cost of maintenance.
Craft an Affordable Budget
You have to make sure that you have the capability to fund your investment property acquisition. You would not want to be buried in debts.
When you are borrowing money to pay for the investment property, lenders usually ask for a minimum deposit of around 10 per cent to 20 per cent of the total amount. In addition, you have to pay right away for other costs such as stamp duty, insurance, maintenance, interest on loans, and legal and conveyancing fees.
With this, you have to check your credit history, making sure it is accurate. It is one of the bases for your loan approval. So, it is also wise to have a good credit position to be more desirable in the eyes of the lender.
At the same time, you need to properly account how the cost of borrowings would impact the investment property. If the loans have variable interest rates, the borrowing costs can fluctuate, and you should be financially ready for this.
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