Property investors make money from investment property in an an extremely varied array of ways. Here is a broad outline of the main types of property investment.
Residential Rental Property Investment
a) Owner Occupancy:
This is the most common type of property investment, possibly the most common type of investment period. Owner Occupancy is where the owner lives in the house he or she owns. It is common for a house buyer to borrow 70 – 90% of the house’s value and take out a mortgage for 20 to 30 years. Returns come in the form of capital gains over the period of ownership.
Some residential property investors disregard this as an effective form of property investment compared to rental property because it does not have same the tax benefits that can make rental property investment so appealing.
b) Rental Property Investment:
Rental property investment involves renting out a dwelling for people to live. This could be by renting out a house, condominium, apartment, or flat. After owner-occupancy this is the most common type of property investment because, in the case of a house, investors you can usually borrow 70% – 90% of the house’s value. This makes it perfect for investors to borrow against there own home to buy it. During the property boom of a couple of years ago it was possible to even borrow 100%. Investors can usually borrow more for a house than they can for other types of dwellings, for example an apartment.
Returns from rental property investment come in the form of rent from tenants and from capital gains.
Commercial Property Investment
Commercial Property Investment is the owning of premises which occupiers rent to make money for themselves. The list of examples is endless, but would include warehouses, retail stores, and office blocks.
While the returns are potentially higher for commercial property, it is generally more expensive as it is often placed in high value areas, such as central business districts. Most importantly, the amount investors can borrow is less, usually 50-70%. It is seen as having greater risks than residential property investment. One reason fr this is because the occupier of the property is more vulnerable to bankruptcy than in a residential property.
As with residential property investment, returns come in the form of capital gains and rent from tenants, in this case businesses.
Property development is an incredibly broad form of property investment. Essentially it involves the purchasing of land or a building, and improving its value for resale.
On a smaller scale this could be simply buying a house and making a few improvements or modifications then selling. Small scale investors sometimes prefer this to rental property investment because they do not have to deal with tenants.
It is also common for developers to buy large blocks of land for subdivision. This is more of a medium scale form of property development.
On a larger scale this could be buying an empty plot of land and building anything from a hotel to a golf course. It involves finding a plot of land then having the imagination to see the best way to develop and market a property for maximum returns. The options for this type of development are endless. An example of one famous developer of this scale is Donald Trump.
Large-scale property development is more difficult to enter because it involves more capital and has higher risks. Because the total cost is unpredictable it is also more difficult to borrow for. However, the potential for profit on such a venture is huge.