A Closer Look at the Most Profitable Types of Investment Properties
Investment properties are a great way to supplement your income and diversify your real estate portfolio.
Despite the country's economic changes over the past few years, investing in property is still one of the best ways to grow your finances.
According to statistics, about 46% of South African homeowners have already purchased a second home in the last quarter of 2020.
These additional properties are purchased mainly because homeowners want an additional stream of income and to secure their financial future.
So the big question is: what type of investment property is the most profitable?
While the answer is certainly not clear-cut, some properties can ensure faster growth than others. Here is a closer look at the most profitable types of investment properties.
1) Rental units
The most popular (and common) type of property investments are rental units, which usually include, but are not limited to, apartments and townhouses.
Many homeowners buy additional properties to rent out to tenants. They then use the monthly income to pay off the bond, and, if possible, to pocket the profit.
It might seem easy enough but being a landlord comes with its own set of challenges. Sure, you might not be paying off your own bond but you need to ensure that the property is adequately maintained during the tenancy.
In the long run, however, you will have a paid-off property on top of your own home, meaning the profit margins on the monthly rental income become a lot higher, or, you can sell the property at a profit should you prefer cash in the bank.
2) Holiday homes
Holiday homes can also be classified as a type of rental investment if you are planning on renting them out.
Homeowners often buy smaller properties in holiday hotspots and rent them out during the year. It is also the perfect accommodation solution for when you want to get away.
Holiday homes are profitable if you buy property in the right area where people frequently go throughout the year. You also have the advantage of raising tariffs during peak seasons thus making more profit.
However, be careful of buying a holiday home that is too far from where you stay. You are still responsible for the repairs and maintenance of the unit, and you will have to prepare it every time your guests arrive or depart.
Of course, you can always appoint someone to manage it on your behalf but make sure it is someone you can trust.
See also: Do Your Homework Before Buying a Holiday Home
3) Vacant land
Investing in vacant land gives you as a real estate developer free reign because you can control its functionality. You can decide to build on it, resell, or rent it out to someone else.
Typically vacant land prices are very low but this all depends on location. Some plots of land can even cost more than some freestanding homes!
Vacant land is usually cheap to own because there are very few running costs associated with it. The most expensive cost associated with vacant land is property tax.
However, this will definitely increase as the years go on so the longer you leave it vacant and purposeless, the more money you will lose.
4) Retirement villages
Thinking about the future, many homeowners decide to purchase a retirement property before their actual retiring age. This secures them a place in a retirement village well in advance.
These retirement villages often come with all the amenities you need to live a comfortable life in your old age.
Before you get there, however, you can rent the unit out to other retirees who don't own retirement properties.
Alternatively, your holiday home can become your retirement investment as well and you can rent it out until you are ready to enjoy your golden years.
5) Fixer-uppers
Last but not least on the list of most profitable investment properties are fixer-uppers.
Homes that are run-down or abandoned often go for less than market value due to their neglected state.
Investors buy these homes for cheap and then put their capital into renovating them so that they look brand new again, at which point they are sold at a profit. This form of investment is referred to as "house-flipping".
Even though house-flipping can make you a lot of money, it can also be risky if you don't do your research. You need to truly understand the market in order to gauge whether it is profitable to renovate the fixer-upper you have your eyes on. You also need to research which renovations will yield the best Return on Investment (ROI).
See also: 4 Questions to Ask Yourself when Buying a Distressed Property
Final thoughts
Choosing the right type of investment property can be very profitable but you should always do as much research as possible. Analyze every single aspect of the property including its location to ensure that you make the right financial decision.