For you who want to utilize property for generating quick profit or use it as personal residential, there are several things you have to check cautiously before deciding to purchase any kind of property. Making the decision carelessly only leads to loss of your money similar with playing at http://188.8.131.52. The most important thing is you have to understand your needs before purchasing the property.
If your goal to purchase any kind of property is simply to get any profit and revenue from the ownership, then you have to understand the world of investment properties in the first place. We have to differentiate between investment property and buying property for personal use. Investment properties is purchasing any type of properties in order to not use it as primary residence.
When you decide to invest some of your money in property, then you need to analyze the best type of properties so you can invest on it effectively. Generally, there are about 3 types of investment properties which will be discussed in the next chapter. Briefly the three types of investment properties are consisted of commercial properties, residential properties and mixed-use.
Pro and Con with Investment Properties
Each of the type offers you with different pros and cons. That is why you have to understand investment properties deeply before jump into this business.
By investing in properties, you can potentially generate some earnings from interest, rental paid, dividends, and even royalties. The form of income and value you will get is based on the kind of investment property you choose.
To be able determine the best use of the properties, as an investor, you have to conduct several in-depth studies. You have to examine the value in each properties based on the potential income and the type that offers lowest risk. This is known as the property’s best and highest use.
For instance, you better choose mixed-use property, for both commercial and residential use when the property is in commercial and residential zoning. Then, you can assess the pros and cons of choosing this type of investment property. You can also evaluate the pros and cons from other investment property type.
When you ascertain which property offers the highest possibility earning return with lower risk, you can utilize the building or real estate property in that manner.
Concept of Investment Properties
Some people may misunderstood of the concept of investment properties. Most of them referred the investment property as the second home while in fact is not the same case. Both investment property and second home don’t have the same meaning.
Second home is sometimes referred to other type of property building such as vacation property, cottage or apartment in other location. The family who purchase this property not intended to rent it nor to resell it. Otherwise, they intend to use the property by themselves as a retreat for weekends or holiday. Thus the second home cannot be called as investment property since it is intended for personal use.
Until this point, we can conclude that investment properties are not second homes nor primary residences. Investment properties in the form of primary residences or other personal use only makes the investor facing many difficulties to secure financing.
When you sell an investment property, either as a company or individual party, you have to report the selling to the authorities. This will result in capital gains which then give tax implication towards the investors.
Properties is a long term investment opportunity you can choose with high potential in return. You can earn profit by future resale of the property and rental paid. Real estate and other type of properties are not classified as liquid investment since they need long time to resell or getting new tenant.
Calculating capitalization rate is very easy to do. If you see the previous explanation, then you will get the most popular and accurate definition of capitalization rate. Capitalization rate is ratio between NOI (Net Operating Income) to the current asset value of the property. You have to sum up all the expenses spent over one year to get the value of Net Operating Income.
In this part, we will give you several simple condition related to real estate property and also http://184.108.40.206. Then we will give you the brief calculation to apply the first formula in order to get capitalization rate. We are not using the second formula in this brief explanation since it doesn’t show the accurate value of the recent cap rate.
Not only that, you cannot apply the second formula to calculate capitalization rate to the inherited or gifted property. It is because the purchase price is zero since the property was gifted to them. Therefore it makes the distribution impossible to compute.
Now we can try to calculate the capitalization rate from the following example:
Suppose you have purchased a commercial property building at the price $ 2,000,000. While the value of NOI you get over one year is $ 200,000. Then, how much the cap rate would be? To calculate it you can use the formula stated above:
Capitalization Rate = Net Operating Income (NOI) / Value
Capitalization = $ 200,000 / $ 2,000,000
Correct Rate = 10%
It means that your property investment can give you 10 percent in return for one year ownership.
Then, how to get the value of Net Operating Income (NOI)? In this case, suppose you rent the building to some tenants which give you income per year $ 220,000. While you have to spent $ 20,000 towards several expenses such as property taxes and maintenance cost. Then it will give you net operating income at $ 200,000. In this example, we assume that the price of the property remains unchanged for one year.
Why capitalization value is very fundamental in the world of commercial real estate property?
This value is very important, for example when you research for the recent sale of an office building that classified as Class A building. If the office building has stabilized Net Operating Income (NOI) of $ 2,000,000 over a year and a purchase price at $ 20,000,000, then it is usual to say that this Class A office building is sold at 10% cap rate.
Actually, there are many version used to measure capitalization rate value. The most popular version to calculate capitalization rate of a property investment is measured by dividing net operating income (NOI) by the recent value of the property. Mathematically, the formula is shown below:
Capitalization Rate = Net Operating Income (NOI) / Current Market Value
What is Net Operating Income (NOI)? The value of net operating income (NOI) is generated by alleviating the expected annual income with all the cost spent in order to maintain the facility and the property building. Not only expenses to do regular up keep to the facility around http://220.127.116.11 and inside the building property, but also the cost spent for paying taxes.
The (expected) annual income can be generated by renting the commercial building property to the tenants. If the tenants only rent the building for less than a year, than you have to sum up the monthly income you get until one year.
The current market value is the recent value of the building property in market rates which valid in the present day. You can also replace the current market value by using the acquisition expense of the building property or the original capital cost. This is shown in the formula below:
Capitalization Rate = Net Operating Income (NOI) / Purchase Price
The second version is the simplest way to calculate capitalization rate (Cap rate) since you don’t need to search the recent price of the property. You only need to calculate all the expense you have spent to do regular upkeep to the facility and the cost for paying the tax which then called as Net Operating Income (NOI). Then you only need to divide the NOI value with purchase price of the property.
Despite this version is simpler than the previous version, the second formula is uncommon in real estate property business. There are two main reasons why this version or formula is not popular to be used in real estate property business.
The first reason is because this formula gives unrealistic calculation of capitalization rate since the purchase price used in the computation is outdated. The real estate property can be purchased in several years or maybe decades ago. Thus it causes the price very low compared to the real recent price of the property.
The second reason why we don’t use this capitalization rate formula because the formula is not giving the accurate representation of the current market value. Whereas we know that property prices fluctuate annually, using fixed purchase price to compute capitalization rate is illogical.
To acquire a real estate, you can either directly purchase the real properties or pieces of land, or indirectly purchase the mortgage-backed securities (MBS) or real-estate investment trust (REITs). The indirectly form is done by purchasing share in publicly traded and it offers less return. Profit From Real Estate.
Indirectly purchasing also gives you less control of the real property. Otherwise, this kind of property investment is more liquid over the real physical property building or land or business at http://18.104.22.168. For you who don’t really understand in-depth knowledge about real estate property investment, the indirectly purchasing property is the best method you can opt.
Opportunities for Profits
The opportunities to get profit by owning physical real estate property are range in the two methods. The methods themselves have not changed over centuries. They are appreciation of the real estate’s value and revenue from leases or rent.
- a) Appreciation of the real estates
Appreciation of the property is generated through different means. As the owner of the property, you can get the appreciation value once you sell the property. The best type of property which gained more appreciation and more flexible to sell is undeveloped land on the city’s borders. The raw land offers bigger potential to develop, construct, so that it will give more profit.
Appreciation value can also come from a land or place with natural resources discovering in it. The price of the land will be increase when valuable material is found inside the land.
The appreciation value for the property also climbs when the neighborhood develops and grows. When the location of the property is in prestigious area or business zoning, then it will gain the market value of the property.
- b) Revenue from rent and leases
You can also get annual or monthly income from property investment. The best method to gain income from property by renting the property to the tenant. Thus you can get monthly and annual income from rent paid. You can choose any type of property to rent. There are two popular types of properties, such as commercial properties and residential properties.
If you rent the raw land with any natural and material discoveries on it, then you can get some royalties from the company. You can also get a free construction on it such as pipelines and cell towers.
You can also gain income from property investment by buying properties sells shares from the owner. This product is known as REITs and MBS investment.
Beyond the option between Investing in commercial property and residential property, actually these two type of properties have good investment potential. Of course, these two type of properties have different financial reward as well as the risks.
You must be familiar with this supposition where the more risk you take in http://22.214.171.124 business, the greater profit you will get. There are no different between property investment and other kind of business opportunity.
Typically, residential property unit provides lesser financial reward than commercial property unit does to the investor. Residential property units including single-family homes and apartment units, while commercial property including retail buildings, office buildings, and industrial buildings. Despite income from commercial unit is higher, risk this unit offering is also bigger.
In order to make decision whether you want to choose commercial type of property investment, you have to understand what is offered by this property. Actually, there are many positive reason why you have to purchase commercial real estate:
- a) High Earning Opportunity: Investing in commercial property will give you higher income potential that residential property. In residential property, you only get most income from monthly rental by personal usage. But things are different with commercial property.
Depending on the area of the commercial property, most of the investor will get 6% to 12% annual return off the investment price. While residential only gives you 1 to 4 percent annually.
- b) Public Eye: In residential property, you should be grateful as a property owner when the tenant at least cares about the condition of the property. Many irresponsible tenant leaves the property freely while he caused any broken condition of the property. You will not face this risk when you rent the property to retail tenants.
Retail tenants have the same interest as yours, the property owner, to keep the building in a good condition. When they let the storefront and the store break, absolutely it will affect the business. None customers want to shop in a broken shop. Thus, you and your tenants will have the same interest to keep the building in a best condition.
- c) Professional relationship: In commercial investment property, you will rent the building to corporate or someone who has business intention. When two party with same intention gather, you can get business to business relationship with the tenants. Therefore it maintains the interaction stay courteous and professional as business partner. The things are different when you rent the property as personal usage.
You have to examine the property’s document and make sure that these documents are comply with the authority’s requirements. To help you deciding whether the investment property is right or not for you, here are the list of basic documents you have to verify before purchasing the property:
a) Title Deed
Title deed is one of the main document that you should verify in the first place. This document simply outline the ownership of the property. Title deed also states the chain of the property owners, the genesis of title and relevant information regarding to the land. You can derive other relevant information from this document.
It is very important that you have to check the title deeds document before purchase any property. Through this document, you can confirm the seller position over the property, whether he has the capacity to sell the property or not. When the title deed document doesn’t state the seller’s name, then you should confirm to the seller who owns of the property. It will avoid future dispute over the property.
b) Sanctioned Building Plan
This document simply states the approval from the local authorities. This “sanction” or actually the approval, will be given by the local authorities based on the building plan and necessary documents submitted by the builder.
Sanctioned Building Plan document is very crucial since it shows the legalized status of the construction building. It is also important to examine whether the building plan has been approved by the authority. You better check the authenticity of the building plan provided by the builder to the issuing authority.
c) Occupancy certificate
This certificate will be issued by the local authorities once the construction finished and the building is ready to be occupied. The certificate is called as “Occupancy Certificate (OC)” or “Completion Certificate”. The certificate implies that the construction building is in compliance with the initial plant and the norms. Therefore the building is ready to be occupied.
d) Tax Paid Receipts
You have to ask the tax paid receipts from the builder or previous owner of the property before buying the property. The receipts will show you whether the tax has been paid or not. When the previous owner didn’t pay the tax, you will be imposed by the penalty once you own the property. The total of the penalty will be 2% per month since the tax payment had not been made.