Last edited 28 Mar 2018

Investment property

Investment property is real estate that is used for the purposes of investment, with the aim being to earn a financial return. This return can be earned either through rental income, the capital gain on future resale of the property or, as is typical, both.

A common type of investment property is an apartment building or rental house, which the owner uses to gain ongoing rental income from tenants rather than using a primary residence.

Investment property can be either long-term, whereby the owner generates capital gains as property values increase over time, or short-term, which is known as 'flipping' - real estate bought, redeveloped or renovated, and sold at a profit. If an investment property is sold for a higher price than it was purchased for, then it will be subject to capital gains tax.

The value of an investment property can be influenced considerably by the way it is used, and property investors typically investigate the most profitable use of a property prior to beginning redevelopment. For example, they will assess whether a piece of real estate near a busy urban high street will have a higher rate of return as a residential or commercial building.

Like all investments, property carries some degree of risk. Typically there is less risk if the property is high quality and in a 'prime' location, although the risk still remains that an investor may pay too, the market will drop, the cost of redevelopment will go up, there are delays, permissions are not received, purchasers do not come forwards and so on. Lower quality property in less a prime location may present more risk but can demonstrate high capital growth, in particular if the area experiences a period of gentrification.

Some of the unique characteristics of investment property include:

  • Unlike stocks and shares, property is not a standardised investment. No two properties are the same.
  • Property is not a pre-packaged investment - owners have to manage the property.
  • Property can often be improved by active management, such as refurbishment, renovation, and so on.
  • Property can be created by acquiring land or rights to land.
  • Property can be traded at auction or sales, and purchases can be negotiated by estate agents and surveyors, but there is no single market.
  • The physical structure of a building may require further investment, but the land on which it stands will not.
  • The property investor can have different forms of title from owning the property as a freehold, a long leasehold, short leasehold, and so on.

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