The Best Investment for any Investor Across all Instruments is Real Estate
Investment is normally a term used for deploying capital in instruments which give a return. The variable return is normally estimated to be higher in those instruments as compared to those where the return is fixed or pre-determined. Let us explore how investing in rental property has its pros and cons, so that the investor may be equipped with the knowledge of this tool before deploying capital.
Return from investing
Investments are normally done for benefit of capital appreciation or receiving interest payments or dividends. Normally investment instruments either give a return at the end of the investment period, which loosely translates to capital appreciation, or they give regular returns, while keeping the capital intact. Investing in real estate and that too in rental property, gives the investor the best of both worlds.
The instruments may be of various types. These could be in the shape of fixed deposits, equity, mutual funds or insurance plans. Investing in real estate can have better yields than these. The returns are normally estimated to be in the range of 8 percent to 12 percent depending on the instrument and degree of risk. The capital deployed appreciates over a period of time and the investor gets a regular return in the form of rent.
While investing in rental property experts recommend buying when the prices are low. For those wanting to pick up a loan the interest rates also need to be low. When the cost of the rental property is low, the percentage return automatically goes up.
Approach to Real Estate Investing
Investing in rental property should be done for the long term. All rental properties are not the same. The investor needs to decide whether he/she would like to invest in residential or commercial property. Commercial properties are known to give better returns, are more stable in terms of duration of leases and have lower maintenance issues for the landlord. These are also generally more expensive than residential ones.
He/she also needs to decide whether to invest in agricultural land, which also appreciates and can be given on rent to farmers. These contract farmers pay a fixed rent and take the risk of a variable return on the produce depending on the climate and the season. Normally, investors entering this field for the first time, invest in residential property as the challenges of renting it out are lesser.
While investing in rental property care should be taken with whom one partners in terms of a real estate agent. He/she should be experienced in this field. A good agent will be able to find a property for you which may not be advertised, through his/her circle of acquaintances. These brokers rely on relationships and may thus be able to pinpoint something interesting even before it comes out on the market. If the tie-up is done with a broker who expects to do business with the investor again, he is more likely to get the investor an honest deal.
Location
A rental property needs to have an excellent location. Houses in densely populated areas are more likely to get rented faster than in sparsely populated ones where there is a dearth of potential tenants. The neighbourhood needs to be a safe one, in order to attract families. Tenants with families will prefer to have a home near educational institutes and shopping areas close by. A rental property near a public transport system is likely to attract more potential tenants.
Support
The investor needs to identify the sources of funds for the property. It is always recommended that he/she should have a small amount of capital readily available post the purchase for repairs of the property. He/she should also develop contacts with repair individuals or agencies close by which can include a carpenter, an electrician, a plumber and a mason. These help in the longer term as time need not be wasted looking for a repairman when the need arises. Having a good attorney and a chartered accountant to consult with on various tenancy issues is also a good idea. The greater the support, the higher is the confidence of the investor to handle the rental property affairs.
Advantages of investing in rental property
There are several benefits of investing in a rental property. These include:
a) A regular return on the capital in the form of rent
b) Appreciation of the capital as the value of property appreciates
c) A contingency residence in case the investor requires accommodation at any time
d) A flexible investment instrument, which gives return in more than one way
e) The investor build long term wealth
f) Taxations benefits. In India, income tax exemption can be claimed against the interest and principal paid towards a home loan and the maintenance cost incurred.
Disadvantages of Investing in rental property
Although there may be many advantages of investing in rental property, one must be wary of the disadvantages too. These can include:
a) The investment is not liquid. The investor cannot take out the capital as and when he wants in short duration.
b) The quantum of investment required is large. The investor may need to take a loan or block a significant amount of your capital.
c) The lending institution may ask the investor to repay the entire amount unexpectedly.
d) Interest rates may increase resulting in lowering the rate of return on the property.
e) The investor may need to deal with immediate repairs that the tenant needs.
Author Bio
The author is an active investor in real estate and advises others as well. He has over 14 years experience in real estate investments for short, medium and the long term. His vast knowledge of investing in rental property has been leveraged by many in his circle.
References
http://www.realestate.msn.com/article.aspx?cp-documentid=23972039
https://www.sorted.org.nz/a-z-guides/property-investing
http://www.dummies.com/how-to/content/real-estate-investing-for-dummies-cheat-sheet.html
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Category: Real Estate
