What Is an Investment Property?
An investment property is a type of real estate property that an individual purchases to earn from the property. Since it requires quite a lot of capital to buy an investment property, it may be possible that several investors purchase the property. However, it may also be possible that a single investor or a corporation purchases an investment property. Moreover, the term’ investment property’ may also describe assets like securities, land, and art that investors purchase to sell on their appreciation.
To determine a good investment property, an investor should use the 1% rule that states that the gross monthly rent should be greater than or equal to 1% of the property’s purchase price. Moreover, an investor should check the property taxes and local regulations of an area. If the regulations are strict and taxes are high, it may not be a viable investment. Similarly, an investor should check the cap rate of the property. It is calculated by dividing the net operating income (NOI) by the market value. As a result, experts recommend investing in properties with a cap rate of 10-12%.
Types of Investment Properties
There are three types of investment properties, which are as follows:
1. Residential properties:
Purchasing investment properties for rental homes is a way for the investor to supplement their income. An investor can rent the property out to tenants and collect monthly rents.
2. Commercial properties:
Some investors purchase commercial properties that can fulfill business purposes. However, these properties have a high cost, but high returns can cover them.
3. Mixed properties:
These types of properties can serve as residential as well as commercial. For example, a building can have a retail store as well as rental homes.
Financing Investment Properties
It’s easy for individuals to secure loans for their primary residence. However, it is challenging to get loans for investment properties. Moreover, insurers also don’t provide mortgage insurance easily. Therefore, borrowers should pay a 20% down payment to secure bank finance. Also, borrowers should have good credit scores and a low loan-to-value ratio. For taxation purposes, the investor should report the rent income to the IRS. However, they have a benefit in reporting the net rental income after subtracting the related property expenses.
Profit on Investment Properties
There are several ways to earn a profit on investment properties. A beginner can earn income from investment properties with little or no money by using money mortgages, microloans, and leasing. They would always have to pay some down payment to purchase a property. Several ways to earn a profit on the properties are as follows:
Rental income: The main way to earn from properties is through rental income. However, the rental income should also cover several costs like maintenance costs, taxes, and insurance. The leftover amount is income. To ensure a reasonable profit, investors should make careful choices about the location of property and tenant profiles.
This is a short term that involves buying the property, increasing its value, and selling it. Several ways to add value are improving the structure, refurbishments, decorating, or building an extension. Moreover, increasing space efficiency by turning a house into flats can also add value. Consequently, investors would make a profit if the difference in selling cost is higher than the added-value.
2. Real Estate Investment Trusts (REITs)
These are companies that trade in properties. Investors can invest in such companies without worrying about day-to-day operations and management of the property. As the property values go up, the investor money/profit will also increase. Moreover, many REITs operate in stock exchanges.
3. Selling on Appreciation
Among the various ways to earn a profit on investment properties, investors can buy a property and sell it once its value goes up. In this way, they will make profit. Moreover, investors can buy a property, add value to the property, and rent it out. In this way, valuable tenants will come, and rental income will increase. Furthermore, to maximize the profits, investors can use tax benefits to maximize their income as there are numerous tax benefits. Moreover, investors can protect their property by buying an insurance policy. Also, choosing suitable tenants, and conducting investment analysis will help an investor to maximize their income.