It’s no secret that investing in property can be a profitable strategy. But deciding to invest in property is only the beginning. One of the biggest decisions you will make as an investor is deciding what type of property will generate the highest return on your investment. You could invest in vacant land, or single-family homes or commercial buildings. You could specialize in strictly residential property, or branch out and invest in retail space or industrial space.
If you aren’t sure which type of property to start with, consider these four types of property and how they can impact your ROI:
Investing in residential property is commonly the first step that new investors make when developing their portfolio. This typically looks like purchasing a single-family home or flat, fixing it up, and renting it out to tenants. Buying a home that needs a little bit of work allows you to purchase a home for under market value, make the necessary renovations to increase the home’s value, and then either sell it for a profit or rent it out to generate a monthly income.
Many investors aim for a rental yield of 7%, but with a great location, an upgraded property, and a steady and stable economy, investors can see closer to 10%. The average return on investment for residential property is anywhere between 1% and 4%.
Industrial property generates higher yields because there is more space available to be rented. More space means more tenants, and more tenants mean higher rental income. When dealing with industrial property, you’re also working with net leases and more extended lease agreements. These properties often see lower turnover rates than residential properties, and tenants typically take more responsibility for the upkeep of the space, which means less work for the landlord. Investing in industrial space requires more capital upfront, and can be more expensive to maintain in terms of repairs and regular maintenance.
While commercial buildings typically cost more upfront then a residential investment, commercial properties usually see an annual return of anywhere between 6% and 12% of the purchase price, depending on where you buy. This type of investment is an excellent choice for landlords and investors who want to take a more hands-off approach to their investment. Tenants in commercial properties tend to take responsibility for maintenance and repairs of their space and are intentional about the upkeep of the building. This means less work for the landlord and fewer maintenance-related costs.
Commercial properties have the most significant potential for higher cash flow, see lower vacancy rates, and typically deal with longer, more stable lease periods.
A mixed-use property is typically a property that has commercial space on the ground floor, such as a retail shop or a restaurant, and then an area for residential living space on top. Since the building is classified as commercial, the stamp duty is lower, but it also means it can’t be purchased with a traditional buy-to-let mortgage. The price for a mixed use property depends on the location, for instance you can find a traditional mixed use property for £300,000 in London and £150,000 in Aberdeen. Returns vary based on the type of establishment taking up space in the commercial area of the building, the average rental rates and the number of tenants that occupy the residential portion of the building.
The best type of property investment depends on your specific goals. If you want a more hands-off approach, you may want to invest in commercial or industrial property. If you are looking for something that doesn’t require a lot of capital upfront, a small residential property in need of minimal repairs might be the best place for your investment. Most investors start with residential properties and then diversify their portfolios with commercial or industrial properties to increase cash flow.
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