Canadian Finance Blog

Residential Property Investing For Beginners

Posted: 13 Jun 2011 02:00 AM PDT

Residential property investment is a potentially excellent form of wealth creation- If you know what you're doing. There are many possible traps, too, and you must have a very clear, realistic approach to your investment strategies and expectations. This is one of the most lucrative areas of capital investment, but it can also be one of the trickiest.

People do make big money in this area of investment, and it's not by accident. Successful investors are those who know how to deal with all aspects of investing in property, including neurotic housing and rental markets and dubious-looking investment propositions.

Property investment basics

There are two common streams of residential property investment:

Housing sales- The commonest form of investment, and theoretically straightforward, this is a high-capital investment, dependent on market moves.

Housing rental- A revenue-creation approach to investment. Also the primary revenue stream for portfolios of properties.

It's no exaggeration to say that you must be thoroughly conversant with all the issues related to either form of investment, right from the start.

Purchasing an investment property

Successful investors buy properties based on their potential for returns, either as direct sales profits, revenue potential, or both.

To assess the value of a property for purchase, you need:

An accurate valuation of the market price and the upside potentials of the local market. This also means valuation of the downside of a property, the lower market prices in that area for that type of residence. The real value of a residential property is typically somewhat lower than the market top, and an averaging of similar properties provides a more reliable indicator of a price.

Costing of your intentions regarding property development, upgrades, renovations, and other works. This valuation should be conducted on a real-cost basis, including legal and other fees. Important: Always consider these costs in terms of their relative value to your purchase, because you aren't going to realize the capital value of improvements until sale or rental.

A clear view of local market conditions- This is very much a risk management process. Assessing the market movements involves looking at price moves in recent years. A 5% return on a property isn't a particularly good investment performance, and you could get far better returns in other markets.

A good investment property, defined

A really good investment property has some clear characteristics:

A good local market- Meaning clearly consistent performance over time with regular demand, (check auction turnover figures) and no doubts about price downside. The ROI in these areas is usually excellent, and you don't get stuck with an unsalable property.

High quality premises- Forget entirely about the "handyman's dream" properties or any rundown looking places, unless you're an expert. Those properties can cost very big money to fix, and the choice is either deep pockets or demolition.

Clear upside on sale price- The evaluation process shows the median price range and you can assess your capital return potentials quite accurately. A return of 8-10% is viable, under that is debatable.

Good rental market- The right property has locked-in value as an income stream.

These are all quality controls on your investment. Get the strategy right, and you'll get your investment moves right.

Author Bio: Tom Mallet is an Australian freelance writer and journalist. He writes extensively in Australia, Canada, Europe, and the US. He's published more than 500 articles about various topics, including property investment and investment property.

Residential Property Investing For Beginners originally appeared on Canadian Finance Blog on June 13, 2011.