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Wednesday, August 30, 2006

What is a good property investment today?

To define investment, it should be differentiated from buying for “end-use”. If the buyer is an end-user, the property’s main use is for personal or internal-business purposes. On the other hand, investment is primarily for profit from the property by way of leasing, re-selling or entering into a joint development venture.

To have an idea of a good property investment, it is imperative to define the criteria of a good property and of a sound investment. Here are some points to consider:

1. Location. A property is deemed desirable mainly due to its location. Typically, corner lots are generally considered better than mid-block lots. Nonetheless, good location for one use, say commercial use, may not be good for another, say residential use. A commercial lot along a national road is very desirable and saleable, while a house along EDSA is generally considered noisy and undesirable. Accessibility and good neighborhood are also points to consider in relation to location. Accessibility is basically proximity to major thoroughfares. Good neighborhood or consistent zoning is basically having similar or complementary land uses in one area. Having a ten-storey condominium project in a subdivision of bungalows would probably annoy residents. It is instructive, therefore, that a buyer should plan what to put up in a property before buying it.

2. Physical Attributes of Property. Apart from the proverbial location, location, location, the physical characteristics of a property is paramount. Regular-shaped properties are very desirable. Tumbok lots are avoided. Absence or presence of creek, power lines, big easement for road and drainage may affect the value of a property. If there is improvement, physical and useful ages are factored in.

3. Affordability. This generally include total costs, payments terms and interest rates. More than this, affordability is related to the surroundings of the prospective property. Buying a 1,000 square-meter lot in a subdivision of 100 square-meter houses may be considered ill-advised unless the buyer intends to subdivide the lot and re-sell it.

4. Saleability. The flip-side of affordability. Saleability is normally from the viewpoint of a seller while affordability is from the viewpoint of the buyer. It is also affected by neighboring or zoning.

Now what are the criteria for making a sound investment?

1. Low acquisition cost. When buying a property, the bottom line price is crucial. While the price per square meter may be higher, more people could buy a 100- square meter property worth P5,000 per square meter than a 500 square meter property worth P2,000 per square meter.

2. Potential capital appreciation or increase in value. One may buy a property worth P500,000 with a potential appreciation of 25 per cent in 5 years or a potential profit of P125,000, or one may buy a slightly higher P600,000 property with a potential appreciation of 50 per cent in the same period for a profit of P300,000. Typically, more mature developments have lower but steady capital appreciation while new developments may have higher capital appreciation and higher risks.

3. Minimal development and maintenance costs. These costs also include operating costs, taxes and interest rates of loans, if any. The last major criterion, but definitely not least, is high revenue generated by the property mainly from rent.In summary, a good property investment has the following attributes: attractive location; acceptable physical conditions of land and improvements; affordability and saleability as compared to surrounding properties; low acquisition and recurring costs, and; high potential for capital appreciation and yield.

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