Understanding property investment is the most vital aspect of becoming a professional real estate investor. If you are just starting out in the Real Estate business then it is vital that you develop a good understanding of what is required when purchasing or selling an investment property. Understanding property investment is the best way to feel comfortable about putting lots of your hard earned money into a home that you aren’t even going to live in.
For instance should you buy residential or commercial property? What is stamp duty & how much will it cost me? What is capital gains tax & how much will it cost me? Where are the best Real Estate Listings? Which real estate agents should you talk to? There are many more questions that I’m sure you want to be answered but for now lets have a quick look at some of the basic concepts that any real estate for beginner books should cover. Once you understand these concepts you will be well on you way to completely understanding property investment.
#1. Which one is for me, residential or commercial property ?
If you are just beginning in property then I would suggest that you stick with residential property. There are many great advantages to commercial property but it is generally slightly more advanced and risky. Lets face it, most people are going to know a lot more about what people are looking for in residential houses because they have all done it themselves- whereas not too many people truly understand what makes a great commercial property investment.
#2. What is stamp duty & how much will it cost me?
Unfortunately you will be forced to pay capital gains tax on your investment property. The exact amounts vary depending on how much the investment property is worth but on average you can expect to pay about 5% of the properties value. For instance if you bought an investment property for $300k then you would have to pay about $15k in stamp duty.
#3. What is capital gains tax & how much will it cost me?
Most professional investors never sell their investment properties so therefore capital gains is not an issue. You might be wondering “what the point in buying a house if you don’t plan on selling it?” You will be surprised to know that there a easy and legal ways of accessing your profits without actually selling your house.
#4. Where are the best Real Estate Listings?
When it comes to Understanding property investment it is important not to over complicate things. Today there are hundreds of websites that have 99% of all real estate listings. This will save you hours and hours of work as you dismiss hundreds of houses that in the old days you would have needed to inspect personally.
#5. Which real estate agents should you talk to?
All of them – If I can give you one bit of advice it would be this ‘Real Estate agents are your friends’.
If you can get a good relationship with real estate agents it will make your job so much easier. Whilst they are working for the vendor it is in their interest to sell the house. Their commission won’t alter too much if the house sells for $300k or $350k but for you that is a massive difference.
Here are a few differences between residential and commercial real estate (CRE) investments that you should know before buying anything :
- are valued differently. CRE income is directly related to its usable square footage, which isn’t always the case with residential properties.
- often see greater cash flow. On an initial investment basis, the yield is often higher per square foot than in residential. A leased or rented multi-unit commercial property generates more income than a single-family dwelling.
- have longer leases. A longer lease length helps stabilize cash flow.
- help diversify risk. What this means is if, for example, you own an apartment building and you lose one of your ten tenants, only one-tenth of the income for that property is lost. In a single-family house a lost tenant means the entire rent is lost.
- are valued differently by the bank; find one that works with commercial real estate, and know that it will want a higher down payment than with residential investments, usually 30 percent or more.
One important similarity to keep in mind between these two types of property investment is that commercial real estate does go into foreclosure. Banks apply the same methods here as in residential properties.
