This is a simple guide to understanding what makes a good income producing real estate investment. This is not a new investment instrument but certainly one that has seen an exponential increase in recent years, notably in buy-to-let (BTL) markets.
However, the fundamentals of this investment market are rapidly evolving particularly in the UK where changes to pension regulations - allowing savers to cash-in their lump sums on retirement - are likely to result in more than 200,000 new investors entering the arena from April 2015.
First of all, what are they?
An income-generating property asset is one that not only provides a rental income but also appreciates in value for future capital gain. It can be owned in its entirety or as part of a collective investment such as fractional ownership or a Real Estate Investment Trust (REIT).
The most familiar income producing property market is BTL although there are increasing options becoming more widely available to smaller investors, such as:
- Student Accommodation
- Hotel Rooms
- Nursing Homes
- Social Housing
- Mixed-use residential
- Commercial real estate such as office space, hotels, working farms and warehouse space
How to choose your investment location
First of all and possibly the most crucial thing to do is immediately detach emotionally when considering where to buy your income-generating property. You are not buying your principal residence and so things like a property's vibe or its feng shui are completely irrelevant.
Using student accommodation as an example, the first and most obvious consideration is the property's proximity to an educational institution! It sounds obvious but research is key with all investments and what you want to know is where the demand currently is and is likely to remain for some time.
In other words, you would pick a thriving university city where there are limited options for affordable housing. You would then check out the nearest university's prospectus which would give an idea of the size of the alumni and also what expansion there may be planned in the future in terms of building more faculty premises for example. These are indications of potential growth in your target rental market which is very important.
You will find it easier to locate a good student accommodation investment from what is being constructed in the residential area close to the university campus. You will more than likely find information on any purpose built student units either in construction or recently completed from local estate agents. These are perfect additions to income producing property portfolios.
If considering an investment in student accommodation it is advisable to make sure there is a sound building management company in place. This will ensure your investment is well-maintained. There should also be an arrangement to ensure consistent tenancy of your student unit. The last thing you need when your investment is located a distance from where you live is to have any kind of 'situation' arise that requires your presence.
The most important thing about income-generating property assets is that they should be hassle-free!
Does it cost a fortune?
The reason income-generating property has risen in popularity in recent years is because of relatively low entry levels. Investments can start from as little as £1000 if invested in a REIT for example which is basically buying a share of a vast property portfolio. In general, this type of investment is SIPP compliant for those who have a while to go before retirement.
The nicest aspect of this investment is that provides the security of an underlying tangible asset. Not only should you be yielding a healthy income from the rental of your property but also, it will be appreciating in value as time goes by.
Can you become a property mogul this way?
Investing in real estate that generates income is exactly the way the rich have been getting richer for centuries. In medieval England, the aristocracy owned the land, (hence the term landlord) which was then rented out to peasants who would farm it. The concept can be traced back to Roman times and so income-generating assets have been around a very long time indeed!
But yes, you can accumulate wealth if you are savvy by re-investing your rental income from one asset into another; then simply rinse and repeat for as long as you can afford to.