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Property Investment: The Golden Rules

The Golden Rules of Property Investment

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Property Invest don’t guessSome people who want to get into property investment guess or speculate when buying an investment property or real estate. The speculator may only buy real estate investments just in their local area only or at a favourite holiday area. This property investment strategy is based on an emotional decision and not on sound research. These types of property investors are speculators, hoping the property investment will work out and the property value will rise. This is called the hope and pray method of property investment and often results in the loss of lots of money and time.The smart property investor does it all differently with education and research. Firstly, they never invest in what they don’t understand. They invest in real estate areas that have long term capital growth and then seek to buy an investment property below its intrinsic value. Then they add value to the investment property and this adds extra capital growth instantly. This makes a greater and more stable return on investment.Property investment: investment rule recap:

  • Research based property investment + adding value = maximum gain.

The investment property must shine During real estate booms property investors can get carried away with glamious finances and tax advantages. However, the most important factors are the same old fundaments of buying an investment property. Buy an investment property you can add value to in an area that has proven capital growth, which you can afford if the interest rates go up. Make your money when you buy the investment property by buying below the market value and then adding value. The investment property must shine through where location and potential, through renovation, come together. Finances and tax advantages are very important but they make no sense if the fundamentals of property investment do not come first.Property investment: property rule recap:

  • Location and potential + finances and tax advantages = maximum gain.

Property investment capital growth or cash flowSome property investors argue that cash flow from the investment is the most important factor while others argue that capital growth is best. However it is clear that both are important depending on the strategy used. If your property investing strategy is income through rental returns, then cash flow is very important. However, if you are basing your investment on capital gains then adding value and longer term view is important. While both are important capital gain is the most significant factor for increasing wealth through property investment. The most significant factor that affects capital growth is supply and demand. If a property is located in an area that has strong demand then the capital growth will higher. If it is out where there is no electrical supply or running water the capital growth may be somewhat less than spectacular.Property investment: capital growth and cash flow recap:

  • Adding value = increase rents (cash flow) and capital gain
  • High demand + low supply real estate area = greatest level of capital gain

Property investment - Land valueMost property investors believe that all land value will rise however they do not always rise at the same rate. Again supply and demand holds the key to understanding the value that is placed on real estate land. When there is a large amount of land released the land has a lower demand. Property investors can buy and hold, waiting for the demand to go higher. Property investment and real estate within cities have a much higher value placed on the land because it is no longer in good supply and has very strong demand for dwelling. All the land within a city has been built on and the only way to build on it again is to add to an existing building or knock down an old building. Developers and property investors pay huge amounts of money to buy into the city areas because they know that the return on investment can be excellent. Many property investors knock down the existing dwellings and build high or low rise units. This increases the dwellings on that land and thus the return on investment is increased along with the capital gain for that property investment.The best way for the property investor to have strong capital growth is to buy into an area that has a continuous strong demand for property and land. Not all properties will bring a good return on investment within a given suburb. A property must appeal to a wider group of buyers if it is to make a strong return. It is important to view the demographics of the area so that your investment property has the appeal of the majority. For example: If your area has mainly families moving into it then your investment property should reflect the needs and desires of this group for maximum returns. Aiming at the wrong group can have negative effect on your rental and capital gain for any investment property.Property investment: Land value recap

  • Low supply and high demand = high gains.
  • Wider market appeal + low supply and high demand= the best return for property investment.