Generally when people are talking about investment risk versus reward it is in the context of equities and other fluid type investments. It is not often spoken about with regard to property investment. Instead property is generally seen as the sound ‘bricks and mortar’ investment. The investment that you end up with a big chunk of something substantial along with a set of keys to open doors. Due to the perceived safety associated with property investment (I stand to be challenged on this statement when taking the recent recession onboard) the returns associated with properties are often quite low. For this reason the property investment is generally only considered in the twilight era of a persons investing career. The recent rise of the REIT has meant everyone can invest in property, even when you don’t quite have the means to purchase a full property. Returns in REIT’s are generally between 4-7% per annum after costs. The properties purchased by REIT structures are safe city center investments often commercial type with iron clad leases lasting thousands of years! Nice and safe. What if you want more and are willing to invest a little time?
Well if you stay away from the city center properties and are willing to invest outside of the main boom areas the return can often be doubled or better. Let us take UK market as an example: In any of the major city centers (London, Birmingham, etc.) the investment properties returns are between 4-6% per annum. When you move to a large town about 1 hour away from the major cities the returns can double to 10% plus (research carried out on rightmove.co.uk). Why the difference? We live in a supply and demand market. The demand for city center property investments is very high thereby driving down the returns. This is partly due to the status quo of ‘owning a property in London’. The demand for non-city center property investments is generally lower so returns are higher. Does the surety of the income justify this difference? In the cases of commercial tenants this may be the case. City center commercial units are more likely to remain tenanted for longer periods whilst more outlying units may remain vacant for some time. In the case of residential tenants it is less justified and generally vacancies can be filled quickly.
The returns associated with investment within a property market are based on the same risk/reward principles of any investment. The property location will obviously have a massive effect on the price but it will also have a significant effect on the investment returns. People who are willing to do some thorough research and sacrifice the bragging rights associated with a city center investment can expect a significantly higher investment that those able to brag about ‘owning a property in London’.