Investment property is a real property that is acquired with the ultimate objective of earning a minimum required return on the equity capital contributed by the investor for its purchase.
There are two sources of return from property ownership: the income return, which stems mostly from the rental income that the property can earn, and the capital or appreciation return, which stems from increases in the value of the property.
The income return of the property is calculated as the ratio of the Net Operating Income (NOI) produced by the property over the acquisition price. However, if borrowed funds are used for the acquisition of the property then the return on equity is the relevant measure.
There are different types of investment property, such as land plots, office buildings, warehouses, stores, shopping centres, hotels, resorts, houses, apartments, etc. Before acquiring any property for investment purposes it is very important to analyze very carefully and realistically its income-earning and value growth prospects, in order to determine the acquisition price that will allow the investor to achieve his/her minimum required return.
Risk analysis is very important when investing in property, as is the case for any investment. The major risk in the case of property is the uncertainty regarding future cash flows and the income-earning capacity of the property acquired. Income earning prospects are directly linked with the property’s value growth prospects. Keeping all else constant, as the income produced by an asset increases its value increases as well