Understanding Investment Properties

What is an Investment Property?

An investment property is a real estate asset purchased for the purpose of generating capital returns. These returns on investment may be generated either through renting the property to produce rental income, capital gains from the appreciation in value of the property or both. Investment properties may be owned by an individual investor, an institutional investor or a group of investors.

Investment properties can be held for the short or long term. Long term investments often involve renting the property for a prolonged period of time before potentially selling it to reap the capital appreciation.

With short term investments, investors typically “flip” the property after carrying out construction and maintenance works to increase its value. With this value-add strategy, investors receive capital gains, calculated as the increase in value between the property’s purchase price and subsequent selling price.

Read also: Knowing Your Capital Stack

The most important attribute of an investment property is that it is not used by the investor as a primary residence. The size of the generated returns can vary significantly, depending on the investment strategy adopted and the economic climate throughout the investment period.

Read also: The Real Estate Risk/Reward Spectrum & Investment Strategies

Types of investment properties

Residential

Residential investment properties may range in size and type. With residential rental properties, people residing in the property pay the owner a predetermined sum of money to live there. Lease lengths may vary depending on the rental agreement and terms. The most common residential lease lengths are month-to-month leases, 12 or 24-month leases.

For residential value-add properties, investors purchase the property and carry out renovations, usually within a short time frame. During this time, the investor may not use the property to generate rental income.

Examples of residential investment properties may range from landed houses or multifamily homes to student accommodation.

Commercial

Commercial investment properties generally refer to office buildings or skyscrapers. These properties range in size and can be occupied by one or more companies. Because of the more permanent nature of office locations, commercial buildings tend to have longer multi-year leases and better long-term stability, providing investors with a steady cash flow and consistent rental rates.

However, commercial properties are generally more volatile and rental rates may significantly increase within a short timespan, but longer leases prevent landlords from making the most out of this since rental rates cannot be adjusted quickly.

Read also: An Analysis of COVID-19’s Impact on Office Real Estate Demand

Industrial

Industrial investment properties may include warehouses, factories, storage facilities, laundromats or any special purpose real estate type that receive sales from customers using it.

Industrial property investments provide investors with the opportunity to generate multiple income streams through the provision of additional services on the property, which increase the investor’s return on investment.

Retail

Retail investment properties are real estate assets that contain retail outlets, with the most common property type being shopping malls. Investors of retail properties derive most of their income from renting the units within the property.

However, some investors may incorporate an additional model in place, whereby they receive a proportion of the sales generated by the retail units on top of the base rental rate. This incentivises the property owner to maintain the condition of the property.

Mixed-use

Mixed-use properties may comprise a combination of any of the above investment property types. Investors of mixed-use properties not only reap the benefits of the particular property type but also enjoy the additional benefit of diversifying their portfolio, reducing the overall risk involved in their investments.

Sourcing an investment property

Online Portals

Online portals such as 99.co and Zoopla allow users to buy and sell properties on their platform, where potential investors may search from a wide range of properties in their desired location, in their own time. While online portals allow investors to conduct their own market research and seek out comparable properties, they ultimately will have to approach an agent to pursue the deal, since most properties are listed by property agents. Investors will also face more competition since properties listed on these online portals are readily available to anyone.

Moreover, agents may not list all the properties on these online portals and certain listings may be outdated, since they have to be manually updated by the property agents.

Real estate or property agents

Real estate agents connect properties between vendors and buyers. The quality of the buying experience can vary from agent to agent. Whilst registering with a real estate agent is a straightforward process, it requires more effort than online portals. Developing a personal relationship with a real estate agent can be a bonus as the agent may recommend good deals or make recommendations to the seller.

Although agents represent the vendor and not the buyer, some agents may favour the buyer if they can complete the transaction within a short time frame, such as recommending properties that need to be sold quickly or better-priced properties. However, sourcing deals through real estate agents comes with its fair share of competition, so vendors rarely have to take up low offers from buyers.

Read also: Six Critical Success Factors in Direct Property Investment

Property auctions

Property auctions have grown in popularity as a great avenue to procure real estate deals. Many properties up for sale at property auctions have to be sold quickly, so buyers are more likely to secure a good deal.

Buying a property at a property auction is a quick process, which can be both positive and negative, since buyers can acquire the property quickly, but also have limited time to conduct research on the property and tend to be highly competitive. Thus, buyers attending a property auction should do their due diligence prior to attending one to make sure they can place a reasonable bid on the property and close a deal promptly.

Read also: Seeking Distressed Assets – A Playbook during Tumultuous Times

Financing investment properties

As properties often require a larger capital outlay than other forms of investing, investors have to ensure they can secure financing of the property before entering into a real estate deal. To secure a loan on a mortgage, investors may have to come up with a larger amount of capital since insurers do not cover mortgage insurance for investment properties.

Taxes and fees

Taxes and fees are levied on investment properties depending on the country. Some common forms of taxes and fees include property taxes, capital gains taxes and stamp duties. Property tax is a direct tax levied on a property, and is imposed by the government of the country in which the property is located.

Capital gains tax is most relevant to value-add investors who purchase property at a lower price before making renovations to the property to increase its value, and subsequently selling it for a higher price. The capital gains tax is typically applied on the profits made, based on the difference in the purchase price and selling price.

Stamp duties are a tax imposed on a property during an asset transaction. Stamp duty is typically calculated on a portion of the value of the property, incrementally increasing with the value or number of properties owned.

Read also: Singapore Real Estate Stamp Duties Explained

Investing overseas

Investing overseas provides investors with the opportunity to diversify their investment portfolio. However, selecting the right market is key to the success of any investment. Different markets are more suited to different investment strategies and property types. Investors should conduct thorough research before investing in properties overseas to better understand the financial and legal intricacies of the markets.

Read also: Important Considerations when Buying Overseas Properties

Alternative real estate investment options

REITs

Real estate investment trusts (REITs) is a type of fund usually structured by real estate companies to own and operate income-producing investment properties in a portfolio. Some REITs may focus their assets in a particular sector, such as healthcare, hospitality, retail, industrial or commercial, while others diversify their assets across a combination of these sectors.

Investing in REITs is considered a form of indirect investment since investors typically do not have any responsibilities or say in the management of the property. REITs invest in properties through capital pooled from investors, and provide returns for their investors through dividend income generated from rents from its underlying properties or capital gains through value appreciation.

Read also: REITs or Real Estate Co-Investments?

Co-investing

Co-investment is an investment structure whereby a pool of investors supplement various investment opportunities. In the context of real estate co-investing, each investor contributes a percentage of the capital required to finance a real estate acquisition, which in turn gives them a percentage of ownership of the property.

The real estate co-investment platform is responsible for the sourcing, upkeep and management of the property as well as the investors’ fund. This way, investors can directly own part of a property and receive returns through rental income for income-generating real estate assets, or through capital appreciation when the group of investors exit the investment when the property is sold.

RealVantage is a real estate co-investment platform connecting investors with carefully selected properties located in different countries. Each property is chosen based on its potential for risk-adjusted returns and vetted by long-time professionals in the real estate industry. RealVantage allows investors to own income-generating real estate assets in countries around the world, providing a source of passive income.

About RealVantage

RealVantage is a leading real estate co-investment platform, licensed and regulated by the Monetary Authority of Singapore (MAS), that allows our investors to diversify across markets, overseas properties, sectors and investment strategies.

The team at RealVantage are highly qualified professionals who brings about a multi-disciplinary vision and approach in their respective fields towards business development, management, and client satisfaction. The team is led by distinguished Board of Advisors and advisory committee who provide cross-functional and multi-disciplinary expertise to the RealVantage team ranging from real estate, corporate finance, technology, venture capital, and startups growth. The team's philosophy, core values, and technological edge help clients build a diversified and high-performing real estate investment portfolio.

Get in touch with RealVantage today to see how they can help you in your real estate investment journey.

Disclaimer: The information and/or documents contained in this article does not constitute financial advice and is meant for educational purposes. Please consult your financial advisor, accountant, and/or attorney before proceeding with any financial/real estate investments.