We’ve all heard at some point about just how profitable property investment can be. Not to mention the elusive common interest of being able to play real-life Monopoly. Property is a no brainer when it comes to smart investment options, right? Well, it’s a bit more complicated than just that. While many real estate agents are all too eager to sell you on the potential returns of property investment, it is often a matter of nuance as to whether or not a specific real estate opportunity will provide meaningful returns. We have compiled this guide to help you invest in property with sheer confidence in every decision.
The Problem With Leasing
The main problem with leasing is that if you were to speak to a specialist in NNN leases, you would quickly learn about the false scale of returns that traditional leasing often offers interested investors. The idea, when it comes to conventional leasing, is to purchase a property, either commercial or residential, and lease it to an entity, be it private or business, and then benefit from the rental income.
The problem comes in when you consider the amount of income against the expense of the investment. If you have purchased the property with a bond, it means that you have a monthly instalment to pay. In several instances, people seem to be happy with the rental income covering the bond payment. However, this will result in zero return on investment up until the bond has been paid off in full.
A Flawed Reasoning
The reasoning is that in essence, the investment is being paid off by the tenant. This method is fundamentally flawed as it does not really meet the standard of a ‘good investment’. You are not seeing a return on investment with scalability reflecting an annual increase in property value and keeping in mind the fact that a mortgage loan or bond can take up to three decades to pay off, if not longer.
Furthermore, the standard leasing practice does not account for the often fluctuating expenses incurred by the owner of a property. Levies, taxes and property maintenance costs remain the responsibility of the property owner. What’s more, you will also need to consider routine home upgrades. Because these expenses are variable, they are nigh impossible to account for in a rental agreement.
The Solution To The Rental Problem
It may be a slightly ad-hoc approach, but NNN leasing is quite possibly the safest and most fiscally sound rental option that a property owner can undertake. Also referred to as triple net leasing, the practice entails holding the tenant responsible for the expenses that would otherwise fall to the owner.
These expenses include maintenance and property tax. The question then becomes ‘what is in it for the tenant?’. Well, the practice does depend on a lower rental charge, often substantially so. This is enticing as an owner because the rental income can be calculated so as to cover bond repayment without the risk of unforeseen expenses.
Beyond Rental Income
Regardless of the method you choose to capitalize on a real estate investment, there are important considerations one must make to ensure that the property is a long term and viable investment that won’t end up losing you a great deal of money. Many industry professionals tend to cite the merits of property as an infallible and unquestionable option in terms of ROI.
This is, unfortunately, a bit of a misrepresentation of the truth. The value of a property must stand to increase when concerning the relevant general property values as well as in relation to economic inflation. An increase in the cost of say 2% in an economy that experiences an inflation rate of 3% is essentially still a net-loss.
Resale Must Reflect Investment Value
Should a property investment not meet this criterion, then upon reselling, you have nearly lost a portion of the value of your initial investment by way of economic evaluation. This may sound like a complex consideration to make when purchasing, but in truth, the information is easy to ascertain. When you are looking to buy a prospective property, your real estate agent must be able to provide you with previous sale information.
This information should include both acquisition and selling prices, as well as the relevant dates. By calculating the increase in market value over time and comparing it to the applicable inflation rates over the same periods, you get a significantly more clear picture of the properties general investment value.