Nowadays investors are flooded with different kinds of investment instruments like fixed deposits, shares, unit trust, gold, bonds and some others. This is very important to find out every thing concerning your risk appetite before investing. Risk appetite is sometimes influenced by your culture, upbringing, character, age or profession, for example, the older a person gets the more risk averse he’s likely to be.
There are the following factors to consider when making an investment.
- First of all you should ask yourself how much capital you have to invest and what is your expected rate of return.
- Another thing to think about is whether it will be short, medium or long term investment.
- You should also define what options are available to you.
- Think how much you could afford to lose.
- Compare these options against each other.
- Make sure you have considered all possible costs of investment.
By taking into consideration all these mentioned points it is possible to narrow down the choices to those that most suit you.
You should keep in mind the next saying: “Diversify your investment portfolio” in property investment. Diversification can come in the form of different property types, for example, residential, commercial and industrial. As concerning shares, it would be investing in different companies involved in different industries. Your overall investment is set off by investments in other companies that may still be profitable in the case that one share suffers losses.
There exist three main broad streams of growth for property investments:
- Capital growth (buy and hold);
- Rental income (cash flow);
- Combination of both.
Some investors look for high yield properties (for the rental income) while others go for capital growth or appreciation. A combination of both could be considered to be the best one.
As concerning prior investing, you should remember that the incidental costs involved like valuation fees, management fees, assessment, quit rent, stamp duty, insurance, legal fees and other costs.
One of the most commonly used methods for investment appraisal is so-called Yield.
Let’s have an example. An existing three-storey shop office is currently tenanted at a net income of $5,000 per month and the property is going for $1 million. So, the question is: Is this a good investment? In order to answer it the next formula should be used:
Yield = ($5,000 x 12) ÷ $1million = 6%
Now let’s have some assumption. The current fixed deposit rates are at 4% per annum, thus, this investment gives you a 2% higher rate of return than placing your money in the bank. The yield should be more than surplus the cost of funds. Seasoned investors would go for a property investment with a yield of twice the fixed deposit rates, which in this case – 8% or more and there are two methods how this can be achieved; to increase the rentals or reduce the purchase price.
To conclude, it should be mentioned that investment requires a lot of knowledge and experience as it is a rather complex thing.