Making Investment Properties Work

Making Investment Properties Work
March 1, 2018

For almost as long as there have been people, humans have held on to valuable things in order to secure and grow their wealth. A lot has changed in the worlds of investing and assets over the years, but some things have stayed consistent. Now, as throughout history, the land is a very valuable thing.

The real estate market has its ups and downs, of course, and individual properties can have their fair share (or more) of problems. But, as the old witticism says, they aren’t making any more land. As more and more of us human beings crowd this planet and compete to live in the most prosperous and beautiful places around, real estate keeps getting more valuable. That’s why individuals and organizations with the means to do so would be wise to invest in the ground beneath their feet.

Real Estate As An Investment

Real estate isn’t always an investment. When a family buys a home, they’re not necessarily looking to make a ton of money off of it. That would be nice, to be sure, but the goal of purchasing a home is usually simple: The buyers want a home to call their own, and they want to have it in the most financially sensible way possible. Given the advantages of home loans over rent payments, buying makes sense. But, again, these sorts of purchases aren’t “investments” in the sense that we might use to describe stocks or bonds. In fact, experts say that treating a home purchase this way can be a bad idea.

There are other sorts of real estate purchases, though, which will very much fit our definition of “investment.” In some cases, buyers of real estate are not necessarily looking to live or work in their purchases and are instead looking to make money through their real estate maneuvers. These purchasers may be looking to rent out the property for income, hold the property as a long-term investment, or flip the property fast for a quick cash-in. In all of these cases, though, the idea is to make money.

Income And Investment Properties

As alluded to above, buying a property to make money can work in a few different ways. Generally speaking, a property is considered to be an “income property” if it does what the name suggests: generate income. The classic example of this is a rental property. The owner of a rental property would like his or her property to increase in value (as would a typical homeowner), but that’s not the main goal in this case; here, the most important aspect is likely to be the property’s ability to generate high and regular rental payments from quality tenants.

In other cases, investment properties may not be rented out as living or workspaces. Making income is always nice, but some investment properties are bought so that they can be sold later—at a higher price, of course. The process may be fast, as in-home flipping, or comparatively slow, as when speculators buy real estate in areas they expect to see the market improve in for years to come.

Making The Most Of Investment Properties

Investment properties can be powerful things—when they work. But how can they be made to work reliably?

In some senses, they can’t—not completely, anyway. That’s why the first step in any real estate investment is understanding what you or your organization can afford to lose. For the same reasons that homeowners shouldn’t use their first home purchase to gamble on a big swing in the real estate market, investors should not put all of their eggs in one proverbial basket. Real estate investors need diverse portfolios, emergency funds, and other safety nets and stopgaps.

Individuals and organizations can benefit from scale. In addition to providing some diversification, owning multiple properties can help make things like property management and rental agreements more cost-effective.

Of course, if you’re going to buy multiple investment properties, it becomes even more important to make sure that you’re getting the right rates on your loans and getting the details right on every financial front, from maintenance costs to taxes. Investment properties are, in the end, investments; they should be treated as such and weighed with careful and dispassionate math.

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Marc Harmon