Most people understand that buying property is an investment in their future. Property values tend to increase over time, so if you own a home, it is likely that you will later be able to sell that home for a profit.
There are ways to maximize property value to create income for yourself. Real estate can be an investment. You can buy an investment property to diversify your portfolio, generate income streams and make a profit.
What is real estate investment property?
Investment property is a piece of land or a building that is purchased with the intention of producing a financial gain, as opposed to personal use or owner-occupation. This return can come in the form of rental or appreciation income, as land and property historically tend to appreciate in value over time.
Investment properties can be residential or non-residential. You can buy property to rent out as studio or office or warehouse space, or you can buy a house that can be rented out to someone else. If your investment property is a multi-family residence, you may be able to live there and generate rental income at the same time.
Some people invest in real estate in a less physical way: Instead of buying actual buildings, they invest in financial vehicles like a real estate investment trust (REIT), master limited partnership (MLP), or property limited partnership. real estate (RELP) that allows them to purchase a portion of an income-generating property or properties with other investors. Some of these trade on public exchanges; others are found on crowdfunding platforms. While these “passive” real estate investments can bring high returns—and avoid the hassles of building management—they can also be complicated and carry significant risk.
What are the types of investment property?
There are different types of properties that can be purchased as an investment. What will work best for you will depend on how you want to use the property and generate income from it.
The second house
If you already own a home, buying a second home offers the opportunity to use one of them as an investment property. The house can be rented out or used for short-term accommodation through platforms such as Airbnb. The home can also appreciate in value over time and can be sold for a profit later.
Duplexes are common investment properties because they allow the owner to rent out one unit while living in the other, if they choose. Or, both units in a duplex can be rented out to generate more income.
Accessory Dwelling Unit
Accessory dwelling units, sometimes called ADUs, are secondary dwellings that exist on the same lot as the primary residence: a basement apartment, detached guest house, converted garage or attached wing with its own entrance. These can be rented out to generate income, although they cannot be sold separately from the main house.
Apartment buildings and multi-family housing
Apartment buildings with multiple units that can be rented out often make good investment properties. In some cases, the property owner may live in one of the apartments.
Home hacking traditionally refers to renting out part of your home to generate income. This could mean converting your basement into a rental space or renting out a room in your home to someone else, either for short-term or long-term stays.
If you have the ability and knowledge to buy and fix up a property, house flipping can generate income. The process of flipping a home involves buying a property, improving it, and then flipping and “flipping” the property (quickly, within a year or so) by selling it for more money than you put into it. It’s faster than waiting for a property to appreciate over time, but carries more risk.
Instead of owning a building, you can choose to buy raw land as an investment property. Land is always in demand, eventually, and you may be able to sell a plot of land that you have purchased to someone looking to build, either residential or commercial.
Residential properties are not the only option for investment properties. You can also invest in commercial buildings, which you can rent out for businesses, offices, shops or restaurants.
How to find and buy investment property
If you’ve bought a home before, you’re familiar with the process of searching for a property. In many cases, you can use the same sites and services you used for that process to find potential investment properties. Multi-family homes, duplexes, and other potential investment properties are often listed on the MLS, and you can use filters that help you narrow your search to find them.
You can also find investment properties on sites that specialize in this space. Commercial properties are searchable on platforms like LoopNet. Find potential properties by searching sites like PropertyShark or RealtyTrac, which offer a large selection of properties that are available for sale, including at auction or through foreclosure. The federal government is also a resource, as it regularly auctions HUD homes it has taken over after the original owners defaulted on their mortgages.
If you want to work with a professional, consider hiring an agent who specializes in investment properties. You may be able to find agents who are familiar with multifamily housing options in your area or who work in commercial real estate. Real estate agents can also help you find these properties.
Investment property financing
Once you’ve found an investment property, you’ll need to go through the application process to buy it and secure financing for it. This process can be similar to securing a home mortgage, but there are some differences.
In most cases, lenders will want you to spend more money and have a strong financial history to fall back on. Investment properties have a higher foreclosure rate, so lenders are less likely to want to take a risk on a borrower with a bad record or little money to give for a down payment.
There are other costs that you will need to consider for an investment property. If you’re planning to rent out part or all of the property, you’ll need landlord’s insurance to protect your property—regular homeowners insurance may not cover it (or cover it enough). If you are entering commercial property, you will also need a special insurance policy for this. You’ll also want to consider the cost of repairs and renovations, as they are inevitable.
The pros and cons of investment property
- Make money: Investment properties offer solid returns, whether through monthly rental or long-term appreciation. Real estate has traditionally been a reliable source of income in particular.
- Diversify your investments: As a different asset class than stocks or bonds, real estate offers a diversified portfolio, which reduces investment risk. Tangible assets like property often act as a counterweight to “paper” ones like securities, rising in value when others fall.
- Tax benefits: Home ownership comes with additional tax benefits and deductions that help cover the cost of depreciation and other expenses.
- Ownership Challenges: Managing and maintaining a property can be a time-consuming task. You can hire help, of course, but that will be an expense that cuts into your profits.
- Additional costs: Repairs, remodeling, replacements, and any other expenses a property may need during its lifetime fall on you.
- Illiquidity: Owning property ties up a significant amount of money that cannot be accessed until you sell the investment. And selling a building takes a lot more time than unloading mutual funds or stocks.
The last word
Investment properties offer you the opportunity to earn money, either through rental income or through appreciation. They can be a reliable source of income, but owning second homes, buildings or land will also tie up your assets; They will take time to manage and time to sell. Fortunately, the variety of real estate opportunities out there ensures that if you want to take the plunge into property, you’ll find an investment that works well for you and your personal finances.