A Real estate that is not the owner’s primary residence but is intended to generate rental income or capital growth is referred to as an investment property. It does not qualify as an investment property unless you rent out a portion of your primary residence. This kind of investment is possible from a small commercial property to a single-family home.
House hacking is a well-known property investment strategy, particularly for newcomers. In order to reduce your mortgage payment, this strategy entails buying a duplex, living on one side, and renting out the other.
You live on one side of the duplex, and the other is used as an investment property. Many investors who start with house hacking later acquire other investment properties or leave the duplex to rent out both sides.
How Investment Properties Work
An investment property’s income creation or capital growth are its financial advantages. Depending on the property, you might be able to take advantage of both of these advantages.
Unless you can find someone to manage your property, owning an investment property requires a lot of hands-on work. You must first buy the property, either with cash or with financing. After you purchase the property, you are in charge of keeping it up and securing renters. Learn more how to make changes to a rental property.
The regular income you will receive from your tenants’ rent is the main advantage of owning an investment property. These rental payments assist in paying the mortgage, maintaining the property, and hopefully turning a profit.
Some people buy investment properties to rent them out for a profit, while others may buy them to sell for a profit. Since you purchase a house, make improvements to it, and then sell the house in a few weeks or months, this business model typically has a shorter time frame.
Types of Investment Properties
You have three main choices when buying an investment property: residential, commercial, and undeveloped land.
- Residential real estate
If you decide to add an investment property to your portfolio, you’ll most likely go in the residential real estate direction. Several different types of properties can be found in residential real estate, including:
- Short-term and long-term rental options
- homes for a single family
- Multifamily dwellings
- apartment complexes
- Commercial Real estate
The tenants of a commercial investment property are businesses, not people. Investments in commercial real estate may include warehouses, storefronts, standalone commercial structures, and other structures that a business may rent for operations.
- Undeveloped Land
Raw land is a type of available investment property, though it might not be as popular or simple as residential or commercial properties. When you invest in an undeveloped land, you can benefit from both time-tested capital growth and exponential capital growth if the city’s zoning changes to allow for more profitable uses of the land, such as industrial use or housing development.
In some cases, renting out the raw to a farmer for crop cultivation, as a campsite, temporary parking, or for other purposes could bring in recurring income.
Investment Property Alternatives
A key benefit of owning an investment property is the chance to generate a consistent income from your investment. But not everyone can do it because of the time and money commitment necessary. There are a few ways to increase your real estate portfolio without actually buying an investment property.
Real Estate Investment Trusts
A sydney buyers agency that owns and manages investment properties and welcomes private investors to join is known as a real estate investment trust (REIT). Investing in REITs is quite similar to investing in other firms’ stock— You buy company shares, then take advantage of the benefits of being a part owner.
REITs frequently pay higher dividends than other stocks because the investment properties that the company owns provide a consistent source of income. The good news is that buying them is straightforward. Publicly traded REITs can be purchased using your standard brokerage account.
Real estate crowdfunding
Instead of each investor purchasing their own property, real estate crowdfunding allows them to pool their resources to finance a particular investment property or project.
You can invest in single properties or get exposure to a variety of properties with one investment on popular real estate platforms. You might be able to invest a little sum of money and generate a set income in the form of dividends, depending on the platform.
Debt crowdfunding and equity crowdfunding are the two main types of real estate crowdfunding. By making a debt crowdfunding investment, you are essentially making a loan to the firm, which it will later recoup with interest.
Pros and cons of Property Investment
What are the pros
- Recurring income: The recurring income potential is one of the most important advantages of owning an investment property and the primary motivation for many buyers. Your property renters will be a source of cash for you each month. An investment property can produce positive cash flow as long as your income exceeds your expenses.
- Tax advantages: Owning an investment property has a number of tax advantages, including the ability to write off depreciation and other expenses incurred in maintaining the property.
- Long-term appreciation: Making money from your investment property isn’t limited to the recurrent income. Rental properties can appreciate or increase in value, just like stocks.
What are the cons
- Lack of liquidity: Once you purchase a rental property as an investment, a sizeable portion of your assets are connected to it. This isn’t always a concern, but it does imply that you lose some liquidity because a portion of your net worth isn’t as easily accessible in a time of need.
- Time investment: This investment will likely be inevitable unless you employ someone or a company to manage your investment property for you. You’ll be in charge of overseeing upkeep as well as the time it takes to locate and communicate with tenants.
- Unexpected costs: Everyone who has ever owned a home will advise you to be prepared for unforeseen expenses. If the building needs repairs, such as a new roof or a broken pipe, you, as the property owner, are responsible for paying for them. When you’re between tenants and the house is vacant, you might also have to incur the unexpected expense of paying the mortgage on your own.
How to Purchase Investment Property
The procedure for acquiring an investment property varies depending on its nature. Individual investors are more likely to buy a single or multifamily home than a huge complex or commercial property. And in that situation, the financing process isn’t all that different from buying a personal residence.
First, many of the same financial institutions that provide mortgages for primary residences also provide financing for investment properties.
- You’ll need to fulfill a number of the standard mortgage conditions, such as a high credit rating
- Money reserves (usually at least six months for an investment property)
- A down payment (between 15% and 20% for a property with two to four units or more for a single-family home).
- Less than 36% debt-to-income ratio and
- Evidence of a steady source of income