What is Investment Real Estate?

What is investment property? You could argue that all real estate is an investment. Whether it’s your principal residence, apartment building or vacant land you own, real estate has historically appreciated over time and provided relatively decent returns. It’s also a pretty safe investment. An income producing property is just what the title describes: real estate that produces an income.  Whether it’s an apartment building, a strip plaza, an office building or just a rental house, I have found that a buyer’s willingness to sign an offer generally comes down to two things: return on investment and risk tolerance. These two principles are directly related. As an investor with a low risk tolerance and the desire to buy a relatively carefree investment will generally accept less of a return on his money. But the investor who is willing to accept more risk will generally be compensated with a greater reward in the long run. Here’s a simple example: There are two strip plazas for sale. They are essentially the same except that one is completely leased and generates a return of eight precent while the other is only 70 percent leased but has the potential to provide an 18 percent return when fully occupied. Purchasing the first deal is a no-brainer. Do your due diligence, put your cash down, and collect your eight percent. The second deal is more complicated. In this deal you are absorbing vacancies, which obviously means the property generates less income and could potentially be more difficult to finance. A likely result is that you will have to put more of your own cash in to the deal from the start. And, in addition to absorbing the vacancies, you will have to factor in leasing commissions and other carrying costs until the balance of the property gets leased up

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Come back for more next week, if you need help or have any questions email us at chrisandsue@royallepage.ca

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