When is a Property an Investment Property?
With regard to Jamaica real estate, with all its ups and downs and a fluctuating dollar in the mix, buying an investment property can still be a money-making venture if your plan is to turn such purchases (investments) into an income-earning business. With such a plan in mind, a purchaser (potential landlord) might want to invest in a property such as a duplex (a dwelling built as or turned into, apartments but with separate entrances for two tenants, i.e. two-storey houses having a self-contained apartment on each floor; also side-by-side apartments on a single lot sharing a common wall) or, other units suitable for family living. With a duplex property the owner has the option to live in one unit while renting out the other(s).
Whether in Jamaica or anywhere in the world for that matter, people always need somewhere to live so owners of real estate may have purchased land or houses for investment property purposes. Investment property means either land or a house purchased solely to rent for a profit. Investment properties can be any type of real estate: apartment buildings, a duplex, a single-family dwelling unit or even a vacant lot. ‘Investment property’ therefore is house or land where the owner is not living on the premises, but sometimes the owner may occupy a portion of it.
The rental money collected from the tenant(s) must at least cover the mortgage, if one obtains and the owner does not have to find that substantial monthly mortgage payment and is on his /her way to owning property. When the mortgage is paid off, the owner continues collecting rent for a clear profit and the owner may consider the purchase of another such investment property; by using the equity in the first property.
So, if you plan on becoming a Jamaican landowner/landlord, do the math! Correct calculations are as important as buying the right property because of the need to cover the costs of running your property for as long as the mortgage lasts, if such a mortgage exists. The object of the exercise is to end up with a healthy property value and of course, a healthy profit.
The downside? If you don’t “do the math” or make a wrong choice on your investment property, your investment can turn into a severe drain on your available cash!
So what earnings should you anticipate in reality? The yield of a property represents the year’s rental income, denoted as a percentage of the property’s value. When considering the yield, remember it is usually quoted gross. Gross rental yield can vary from as little as 4% up to 15% or even 20% of the property’s value. Average rental return is around 10%, and anything less than the desired 10% may not be worth all the effort, unless your main investment goal is capital appreciation.
Net yield is calculated using the amount left after purchase fees, repairs, void periods (times when there is no tenant for whatever reason) and subsequent mortgage repayments plus running costs.
The potential investor may want to mull over the following:
- Cheaper property will usually provide a better annual return whereas expensive properties in upscale areas may provide a lower return but are more likely to appreciate in value.
- Look for rental income that equates to approximately 130 – 150% of the mortgage repayments and allows you, as landlord, to cover any of those ‘void periods’ after a tenant vacates plus maintenance, repairs, insurance, refurbishing, etc.
- Potential landlords must always consider whether or not their expectations on returns on investments are realistic, so, seek out a reputable real estate agent and take him/her out for lunch, pick those brains and find out!