The Investment
Investment Process
Each investment requires the investor to follow a certain procedure. It is therefore essential for the investor to understand the entire purchase procedure from start to finish, including exactly what funds are required, at what stage of the purchase, allowing for accurate cash flow analysis and maximum financial leverage.
Return on Investment v Risk Level
All investments represent a level of risk that is often directly proportional to the potential returns. Typically, high potential returns represent the higher risk categories and vice versa. Investors should always take time to identify the potential risks and returns before assessing if they are acceptably balanced.
Location
This is always a major factor with any property investment. The location of an investment is directly linked to the return on investment an investor can expect from both capital growth and rental yields. We recommend that investors look at current property and rental prices in the direct and surrounding areas of any proposed investment to obtain firsthand knowledge of pricing and, where and when possible, personally visit the property.
Typically, early entry into emerging markets can offer the highest return on investment. However, in many circumstances, this is associated with the highest levels of risk. As IPIN deals with property that is primarily an investment vehicle and its only purpose should be to generate returns for the investor.
Market Drivers
If a market is expected to offer continued growth, it is important that as an investor you understand what the "market drivers" are for this growth. Some common "market drivers" are listed below:
- Cost/Value
A property purchase is only an investment if it is purchased at the correct price, allowing for its value to appreciate and/or generate solid rental returns in proportion to its cost.
- Infrastructure
An excellent sign of a future investment property hotspot is when there are considerable infrastructural improvements being made to a specific area. Generally, this includes local attractions, services and amenities, but also, and often most importantly, additional airports, ports and roads. The re-location of corporate companies and other industrial sites are also strong signs.
- Natural Factors
These are often the most obvious "market drivers". Many locations base their bid to increase tourism and property demand on the fact that the area enjoys excellent weather conditions and can offer stunning beaches, tropical views or are positioned next to mountain ranges offering quality skiing conditions. These factors are obviously very important, but it is essential that other "market drivers" are also considered in association with these.
- Tourism
Tourism is the primary factor that enables many emerging property investment locations to create a successful property market. With increasing low cost flight destinations and the world becoming effectively smaller, the door is open to many relatively unknown destinations that are beginning to offer new and exciting holiday destinations to tourists around the world. Today's tourist is keen to experience new places after experiencing the same traditional locations for many years.
- Local Demand
A key element to successful property investment is to invest in areas that have a strong local demand. This is often not in the aesthetically pleasing beach locations but in the centre of growing towns and cities. By investing in high demand locations such as these the investor is not limiting any potential resale to second home or overseas buyers. Often social housing and workforce housing projects can reduce risk significantly.
- Political Stability
With terrorism around the world on the increase and many political, religious and legal implications to consider it is essential that the stability of an investment location is considered prior to any investment. Political stability of a location can act as a very strong investment market driver.
Developer/Constructor
Once the above factors have been considered the investor must be sure that the vendor / constructor has a proven track record and is operating legally, ethically and with sufficient funding. As mentioned previously IPIN commissions independent lawyers to produce a legal review of all projects prior to making them available to members, some of the typical checks made at this stage are highlighted below:
- Company Registration and Owners Review
It is important that the development / construction company is an officially registered company and that the directors of the company are reputable.
- Land Title Confirmation
This ensures that the company is the legal owner of the land and that there are no encumbrances or liens against the land parcel.
- Various Construction Licenses
There are various licences required by local and national authorities for the construction of any development. A simple check can confirm that these have been granted and that construction can begin without issue. In some cases projects may be pre-license which should always be made clear to the investor with provision for funds to be held in escrow until such time all required documents are in position.
- Developer Background Checks / Track record
It is important that a developer has a strong transparent background especially under current market conditions. Previous projects can provide a good indication of quality and achieved completion deadlines.
- Build Quality Guarantees
All good developers offer a guarantee on construction and a detailed quality specification.
- Sales Agreements / Contracts
Sales agreements should be checked carefully as they outline the entire sales process and responsibilities of all parties under various scenarios. Lawyers assigned by IPIN will often request changes to this document to ensure that certain criteria are met. One important aspect required to operate certain investment strategies that is often not initially offered by developers is the ability to re-assign the contract prior to completion.
- Fund Security
The way in which investors funds are handled is of premium importance. Where possible, it is preferred that funds are held in escrow or with a recommended lawyer until all aspects of the agreement and outstanding paperwork are in position.