One question that I get pretty often when discussing real estate is “what do you mean by ‘investment property’”?. Quite simply put, an investment property is real estate that generates income. In theory, any property could become an investment property and anyone could be an investor. Forbes estimates that 10% of the world's richest people made their money in real estate, and that it’s the third most common industry to build billionaires. It's also been commonly said that 90% of millionaires became so by investing in real estate. Below, I’ll explain the two main ways to generate a profit from property:
This may be one of the most common ways in which people anticipate investment from a property. Living in one property and renting the other out, or even owning and renting out multiple properties, is a relatively quick way to start generating a return on your initial purchase costs. These days, both long term residential rentals and short term/vacation rentals are both popular means of generating rental income.
These can contribute to what's known as your Real Estate Portfolio, showing the value of your real estate investments. However, you should consider ongoing maintenance costs and the risks that come with having tenants in your property such as incorrect internal maintenance or wear-and-tear during their tenancy.
While rental income provides a generally stable return on your investment over a prolonged period of time, selling the property can provide a huge injection of cash at once.
Overtime, property values tend to appreciate. For example, a vacant lot bought in 2000 may have been purchased for $50,000 and sold for $150,000 in the 2020s. That means the owners would’ve earned $100,000 from that sale by simply sitting on it for 20 years. These specific values, however, aren't always guaranteed. They may depend on the general development of the surrounding area such as the quality of neighboring homes and the addition of nearby foodstores, schools, restaurants, parks etc.
Another way to boost your resale value is of course through renovations. You can update your family home to prepare it to hit the market, or you can buy a fixer upper, build up your equity (look out for a blog post on this later!) in it then sell it for a much higher price than you purchased it for. “Home flipping” is a huge industry generating impressive returns.
For the more risk averse like myself, a pretty stable way to ensure returns on your property are to rent it out at first for a while then sell later down the line to give you a large cushion of cash to fall back on. This way, you'll have steady income for a number of years and also likely benefit from appreciation of the property value at the end of that period.
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