Property Investment – An Overview for Beginners

by Na'imah Zuki

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Anyone would think from the market hype that property investors simply made money by buying and selling, and nothing ever went wrong. Nothing could be further from the truth. Property investment involves risks, sometimes serious risks, and knowing how to avoid those risks is the key to good investment. You really do need professional advice to invest effectively, and you must know the basics of property investment before you even pick up a phone.

Property Investment Fundamentals

The aim of property investment is usually twofold:

1. To make capital gains on the value of properties
2. To earn income from the properties in terms of rental

Sounds simple enough, doesn’t it? In practice, making money in the real estate market can be very hard work, and expensive. Except in boom markets, or in times of serious shortages of properties, nothing can be taken for granted in the property market. Capital gains can’t be guaranteed, and properties can sit on the market literally for years and not sell.

Rental income is another possible mirage, in terms of making good returns. The rental market is highly volatile, and return on investment can be quite slow. If you pay $400,000 for a house, and you’re getting $400 a week net in rent after tax and agent’s fees, your return on investment is 5%, and that’s without maintenance costs, rates, etc. Your real net return is likely to be about 4%, on that basis.

The lesson is simple: Property investment must be planned.

Perils and Pitfalls of Property Investment

There’s another side to the property investment market which doesn’t get a lot of attention- Buying properties often means buying their problems, as well. Some property investors inadvertently buy buildings that have serious, extremely expensive defects which must be repaired before the buildings can legally be used, let alone sold. Profits can literally be annihilated that easily.

Titles, too, can have problems affecting property values very negatively. Some “bargain” rural properties are on sale for very low prices because there’s no legal access, for example. Getting that sort of problem fixed can be almost impossible, and sometimes impossibly expensive in legal fees, as well.

Learning Your Trade As A Property Investor

If all of this sounds a bit off-putting, there’s another side to the story. Many people do make very large amounts of money every year in the property market.

These are the basic operational rules, and they’re all “must do’s”:

  • You must have an investment strategy before you buy investment property, preferably discussed with a professional property investment advisor.
  • You must have legal advice during purchase and sale of properties.
  • You must have a full knowledge of basic real estate transactions, including buying, selling, leasing and property contracts.
  • You must fully understand and be able to manage the financial aspects of lines of credit, mortgages, and property management insurance.

Use these four points as a checklist.

Do the property market courses, if you possibly can.

The most important part of investment is developing your knowledge base so you can accurately assess your investment options. Stay focused, and you’ll become an expert yourself.

{ 5 comments… read them below or add one }

Jeff March 18, 2011 at 10:23 pm

One of the greatest risks in property investment comes with investing on foreclosed bank owned properties. Often times the previous owners who were facing foreclosure will destroy their own home out of spite knowing eviction is inevitable. A lot of the damage is hidden as well, like damage to electrical and plumbing. It’s very smart to have a full inspection done with all utilities tested before investing in a foreclosed property.

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Accordion door March 25, 2011 at 1:39 pm

Great informational post! Beginners should read this post before embarking on property investment. Thanks for sharing.

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Property Croatia April 4, 2011 at 9:17 pm

Here in Croatia many investors buy old houses and then renovate them before selling. I think this is good way to invest in real-estate because in this way you make some new value. Simply buying and re-selling properties is speculative business.

PS. Regarding foreclosed bank owned properties i totally agree with Jeff.

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income property November 4, 2011 at 1:15 pm

As a property investor, you have control over most parts of your investment.

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Real Estate Agents December 12, 2011 at 1:36 pm

I would recommend that a beginning investor first learn everything he can about the pros and cons of real estate investing. There are a number of very good books, websites and blogs out there. The uninformed investor that just goes out and buys something relying solely on a broker is most likely going to be disappointed in their actual results. Every successful investor has made mistakes. There is no reason a beginner should repeat most of them with the information now available to beginners.

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