Property Investment - Why Property

Why Invest in Property?

We believe that investment in income producing property produces the most acceptable balance between the production of income and the achievement of capital gains.

This is so for a variety of reasons which are based on the unique characteristics of property investments.

To understand these characteristics, an understanding is required of the way a property investment works - what actually causes the 'sustainable income' and its growth, and what causes the value of a property to change, and in the case of a well purchased property, invariably to increase.

What Determines the Value of a
Property Investment ?

The value of a property comes directly from two components, and as the value of these components change, then the value of the property changes.

First, the value of a property comes from its ability to produce an income, this income usually, but not always, is in the form of net rentals paid by tenants under a lease contract.

Second, the investment market (that is, the great many individuals and companies who are looking at financial investments and their returns from time to time) gives the property a 'capital value' by applying a capitalisation rate to the net income - the capital value being the price the market is prepared to pay for a property which produces that income.

The capital value is therefore a result of (1) the required market yield and (2) the net rental income. Hence an investment property that is never able to produce an income strictly speaking has no investment value.

A private residence falls into this no-income category - unless a usable value is able to be achieved upon sale, it has no "investment" value, and only offers the accommodation of a lifestyle which is not, in itself, a financial return.

An investment property, therefore, is dependent upon income and then capitalisation rate, and all other principles of property investment revolve around these components.

Remember, the value of any investment asset, be it property, shares, or a business, is solely determined by the income it produces (or potentially produces) capitalised at an appropriate rate or return for the risk.

Next:The Importance of Property Income

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