27 Aug 2019

Investment Properties 101

Investment properties are timelessly attractive to investors because of its high return. If we’re asked to think of an investment property, we’d probably think of condominiums or a house for rent. However, if you consider large investment properties like hotels, resorts, or office buildings, you’d have to consider property funds or REITS, because they require massive capital and knowledge to manage in comparison to condos and homes.

Of course, in the market of investment properties, there is an element of development for those who want to be one of the owners of a quality investment property. Investment properties are becoming very popular abroad, and are often coined as IP.

How are Investment Properties (IP) different from REITs?

            If we only consider the fact that we can invest in large and high quality properties, investing through IPs and REITs are probably not very much different. However, what makes IPs more interesting as property investments than REITs is that IPs give its investors their ‘title deeds’.

            Another reason that makes IPs more popular is because, when compared to investing directly in condos, renting out IPs can be done daily, while condos are generally not allowed to be rented out daily. Most condos are rented for a period of 6 months to 1 year. If IPs can be managed to have high occupancy, there is potential for higher return.

            And as we all know, investment properties are large requiring both more knowledge and experience than investing condominiums. However, because IPs are designed to have IP managers. Highly experienced professionals are typically hired to manage the IP. Investing in IPs can be considered as the combination of the benefits of investing directly in the property and investing indirectly through trusts.

            The return on IP investments depends on the policy and negotiations between the owner and the managers. Project managers may guarantee 7%, 8%, or even 10% annually. If managers can deliver more than that, it is considered profit of the project managers. However, if they perform less than the guarantee, the managers will have to bear the loss themselves.

The privilege to stay in the property is also dependent on the agreement with the project manager. Generally, 25-30 days of stay are granted to investors. Compared to REITs, this is a clear advantage, as REITs do not offer any stay privileges to investors. And because IPs give the investor the title deeds, they can be used to secure loans for future investments.

IPs are investment properties with low liquidity compared to REITs

Of course, IPs have their limitations when compared to REITs, and one major one is ‘liquidity’. REITs can be traded on a daily basis while IPs require the entire sales process much like a condominium. It may be easier than selling a condo in that owners can announce within the network of the project manager or that property, which may give more liquidity in that sense.
            There are many types of IPs in the market. For those looking to invest in real-estate, IPs may be an attractive alternative to enhance your investment returns that may very well compete with REITs.