Pattaya Property Investments
Investing in property involves the purchase, ownership, management, rental and/or sale of real estate for profit.
A major challenge to an investor seeking solid investment opportunities is to evaluate prices and potential returns. For this reason, locating properties in which to invest can involve substantial work and competition among investors to purchase suitable properties can be daunting.
If you buy a property with hopes of renting it out, location is key. Homes in high-rent or highly populated areas are ideal. Also think about potential selling points for your property. If it’s near public transportation, shopping malls or other amenities, it will attract renters, as well as potential buyers if you decide to sell later. The more you have to offer, the more likely you are to please potential renters.
Once an investment property has been identified, and preliminary due diligence (investigation and verification of the condition and status of the property) completed, the investor will have to negotiate a sale price and sale terms with the seller, then execute a contract for sale.
Most investors employ real estate agents and real estate lawyers to assist with the acquisition process, as it can be quite complex and improperly executed transactions can be very costly. During the acquisition of a property, an investor will typically make a formal offer to buy including payment of a deposit to the seller at the start of negotiation to reserve the investor’s rights to complete the transaction if price and terms can be satisfactorily negotiated.
This deposit may or may not be refundable, and is considered to be a signal of the seriousness of the investor’s intent to purchase. The terms of the offer will also usually include a number of contingencies which allow the investor time to complete due diligence, inspect the property and obtain financing among other requirements prior to final purchase.
Within the contingency period, the investor usually has the right to rescind the offer with no penalty and obtain a refund of his deposit. Once contingencies have expired, rescinding the offer will usually require forfeiture of the deposit and may involve other penalties as well.
Real estate assets are typically very expensive in comparison to other widely-available investment instruments (such as stocks or bonds). Some real estate investors will pay the entire amount of the purchase price of a property in cash. Others will fund a large portion of the purchase price using some sort of financial instrument or debt, such as a mortgage collateralized by the property itself.
The amount of the purchase price financed by debt is referred to as leverage. The amount financed by the investor’s own capital, through cash or other asset transfers, is referred to as equity. The ratio of leverage to total appraised value (often referred to as “LTV”, or loan to value for a conventional mortgage) is one mathematical measure of the risk an investor is taking by using leverage to finance the purchase of a property.
Those investing in property usually seek to decrease their equity requirements and increase their leverage, so that their return on investment (ROI) is maximized. Lenders and other financial institutions usually have minimum equity requirements for real estate investments they are being asked to finance, typically on the order of 20% of appraised value..
By leveraging the purchase of an investment property, the required periodic payments to service the debt create an ongoing (and sometimes large) negative cash flow beginning from the time of purchase. This is sometimes referred to as the carry cost of the investment. To be successful, real estate investors must manage their cash flows to create enough positive income from the property to at least offset the carry costs.
A typical investment property generates cash flow to an investor in four general ways:
- net operating income (NOI)
- tax offsets
- equity build-up
- capital appreciation
Net operating income, or NOI, is the sum of all positive cash flows from rents and other sources of ordinary income generated by a property, minus the sum of ongoing expenses, such as maintenance, utilities, fees, taxes, and other items of that nature (debt service is not factored into the NOI). The ratio of NOI to the asset purchase price, expressed as a percentage, is called the capitalization rate, or CAP rate, and is a common measure of the performance of an investment property.
Tax offsets occur in one of three ways: depreciation (which may sometimes be accelerated), tax credits, and carryover losses which reduce tax liability charged against income from other sources. Some tax shelter benefits can be transferable, depending on the laws governing tax liability in the jurisdiction where the property is located. These can be sold to others for a cash return or other benefit.
Equity build-up is the increase in the investor’s equity ratio as the portion of debt service payments devoted to principal accrue over time. Equity build-up counts as a positive cash flow from the asset where the debt service payment is made out of income from the property, rather than from independent income sources.
Capital appreciation is the increase in market value of the asset over time, realized as a cash flow when the property is sold. Capital appreciation can be very unpredictable unless it is part of a development and improvement strategy. Purchase of a property for which the majority of the projected cash flows are expected from capital appreciation (prices going up) rather than other sources is considered speculation rather than investment.
Risk occurs in many different ways at every stage of the investment process. Management and evaluation of risk is a major part of any successful real estate investment strategy