10 min read Jun 01, 2024

What Is an Investment Property and How Do You Buy It?

Editor
Edited By

Megha Mulchandani

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Editor
Edited By

Megha Mulchandani

Editor, Houzeo
About

Megha M. is an adept content editor well-versed in the intricacies of American market dynamics and economic trends. In her free time, she excels as a versatile theatre artist and public speaker.

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Recent statistics show that the market has been growing positively for several quarters and that investor confidence is rising. According to Swiss Re, investment yields in the USA will rise to 3.7% in 2024 and 4.1% in 2025. 

Furthermore, according to Freddie Mac research, US investment property values have risen at a rate of 3.8% yearly during the last 40 years. These numbers allow us to make a strong case for why purchasing an investment property is a great option at the current time.

Purchasing an investment property can provide a variety of income options. These include steady rental income, passive income streams, and possible value growth. Let’s take a deeper look at what is an investment property and how do you buy it. 

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📌 Investment property key facts

  • Data indicates that about 34 percent of households live in rented accommodation. Of those, 42 percent reside in single-family homes and 36 percent in multi-unit apartments.
  • Census estimates estimate individual investors own around 70% of rental homes in the US.
  • There are 4.71 million existing investment properties available for sale in the US. This indicates a strong and growing real estate market, making investment properties an attractive option.

What Is an Investment Property?

Unlike primary homes, investment properties are real estate assets bought expressly for generating income or profit. As income-producing assets in your financial portfolio, investment properties differ from your primary home, which you live in personally.

Important Factors Influencing Returns on Investment Properties

Rental Income: The most typical and direct way to make money from investment properties is through rental income. You lease the house to renters who consistently pay you rent. Location, kind of property, and state of the market all affect the rent you can charge.

Property Appreciation: Your investment property’s value may rise over time. This appreciation gives you the chance to sell the house later on at a profit. The state of the economy generally, property upkeep, and local market patterns can all affect appreciation.

There are other benefits to think about, even if rental revenue is the main factor influencing investment property returns:

  • Tax Benefits: The tax benefits that investment properties offer can greatly increase cash flow. Tax-deductible expenses such as mortgage interest, upkeep, and repairs can reduce your taxable income. 
  • Portfolio Diversification: Investing in real estate broadens your assets outside of stocks and bonds. Given its often low association with stock market performance, real estate can act as a hedge against stock market volatility. 

Type of Investment Properties

It’s important to learn about the various types of investment properties once you have a basic understanding. Each one provides particular benefits and factors to think about:

Residential Properties

These are the most common investment properties. They include:

  • Single-Family Homes: A solid option for novices, they provide the potential for appreciation and consistent rental income.
  • Properties with several units (duplexes, triplexes, apartments): You can make money from several renters; however, it will require more managerial work.
  • Condominiums and Townhouses: While they could require less upkeep than single-family homes, condominiums and townhouses sometimes have limitations on rentals or changes.

Commercial Properties

These properties are leased to companies for use in their activities. Usually requiring a larger initial outlay, they might provide longer lease terms and better rental rates. They include:

  • Office Buildings: They provide space for businesses of all sizes.
  • Retail Spaces: These spaces are found in shopping malls and storefronts.
  • Industrial Properties: These serve the demands of production and logistics through warehouses and manufacturing facilities.

Mixed-use properties

These have both residential and commercial areas in one building. This can be complicated to handle, even if it can provide several revenue streams and room for expansion.

Raw Land

Raw land is land bought with the plan to resell it for a profit following development. Though development schedules can be long, this can be profitable in developing areas. Zoning, environmental issues, and development potential all need careful thought.

Selecting an Appropriate Property Type

Your resources and objectives will determine the best kind of investment property.  Take your decision based on your budget, desired degree of management participation, and risk tolerance.

What to Know Before Buying an Investment Property

You can easily generate income in the form of rents with investment properties. However, you should understand and know the following before making a decision: 

Ensure You’re Financially Stable

Real estate investors must be cautious about financing, including revenue sources, debt, and monthly expenses. Having reserves in case of an unexpected crisis also helps. To make the lending terms more favorable, you need to ensure a decent credit score.

Real estate investments require substantial initial capital expenditures. Therefore, it is necessary to be financially stable before buying an investment property.

Ensure Return on Investment

Your ultimate objective as a wise real estate investor is to maximize profits. To find properties with excellent rental demand and significant appreciation potential, conduct an in-depth market study. Also, determine the costs of upkeep, insurance, taxes, and mortgage. 

Assure that rental revenue is more than costs to have positive cash flow. Recall that patience and smart preparation are essential, as real estate is a long-term game.

Take Calculated Risks

Real estate investing entails risks, such as property deterioration, problematic tenants, and market fluctuations.  Unlike a personal residence, an investment property acquisition is a commercial decision. 

When making decisions, prioritize financial data and return prospects over subjective beliefs. Taking more calculated risks will definitely help you in the long run.

Study the Market Waves

Real estate markets often fluctuate. Take particular insights and study the market history to predict future trends, stay ahead of others, and make the best decision for your next investment property.

How to Find and Buy Investment Property?

Finding investment properties that have high return potential requires more than just capital in hand. Here is how you can find the best rental property investment for yourself:

Find the Ideal Location

Choosing the ideal location for your investment property is critical. The local employment market, crime rates, and the quality of schools all have a big influence on profitability. 

Moreover, factors like vacancy rates, job growth, and infrastructure projects can have a substantial impact on profitability. Conduct extensive research to find places with high development potential. 

Know the Market 

It’s crucial to understand the current real estate market in your preferred area. It includes being acquainted with typical rent costs, property valuations, and the demand for rental properties. 

Plan Your Finances

Planning your finances is an important stage when acquiring an investment property. Investment homes frequently require higher down payments and tighter approval requirements than residences. 

Before your property hunt, look into numerous financing possibilities and find the right one for your needs. Explore financing alternatives before investing to ensure you have the freedom and resources to implement your plan. Consider these funding options:

  • Traditional Mortgage Loans: These loans from banks or mortgage lenders need a down payment and monthly installments.
  • Hard Money Loans: Quick, asset-backed hard money loans are secured by the property being bought. They are suitable for house-flipping projects that need immediate cash but may not qualify for standard financing owing to conditions or other issues.
  • Private Lenders: Individuals or businesses lend money for real estate ventures. They may support unorthodox or high-risk initiatives because of their lending flexibility.

Look for the Right Deals

Not all low-priced houses are good investments. For better ROIs, look for inexpensive properties with potential for expansion. Finding the right deal on the right property can elevate your house-flipping game to another level. 

Think about fixer-uppers as well, but keep in mind that renovations are expensive. When figuring out the possible return on investment for fixer-uppers, particularly carefully include them to optimize your profit.

Calculate the Total Cost of Your Investment 

Assess the full investment cost before buying or investing in real estate. Consider the purchase price, renovation costs, property taxes, insurance, and upkeep. By analyzing financial factors, real estate investors may make decisions that match their goals. 

Let’s Understand this with the help of an example:

Total Investment Cost:

  • Purchase Price: $300,000
  • Down Payment: $60,000
  • Closing Costs: $10,000 (assuming 3.3% of purchase price)
  • Renovation Costs: $20,000
  • Property Taxes (annual): $3,000
  • Property Insurance (annual): $1,500
  • Upkeep (annual): $3,000
  • Total: $407,500 (This considers the down payment as part of the investment cost)

Yearly Recurring Costs:

  • Property Taxes: $3,000
  • Property Insurance: $1,500
  • Upkeep: $3,000
  • Total Yearly Recurring Costs: $7,500

This example can help you get an idea about the costs associated with your investment property.

Types of Loans to Buy an Investment Property

  • Conventional Loans: Conventional loans need a down payment, good credit, and income, making them a common choice for real estate investors.
  • Federal Housing Authority (FHA) Loans: Down payments are lower for federally insured FHA loans. They are less beneficial as investment properties since the owner must live in one of the apartments.
  • Veterans Affairs (VA) Loans: VA loans require a zero down payment for veterans and active-duty soldiers. As the name suggests, only veterans qualify for these loans.
  • Hard-money Loans: These loans are primarily for shorter terms and are asset-based. Issued by private lenders at higher interest rates, they’re ideal for quick funds.
  • Private Money Loans: Private money loans from people or investors come with various terms and conditions. 
  • HELOCs: HELOCs work like credit cards but are backed by home equity. They provide revolving lines of credit with a spending limit that borrowers may use and repay over time. 

Pros and Cons of Investment Property

Understanding the benefits and drawbacks of investment properties is crucial. Let us look at some of here:

Pros of Investment Property

  • Possibility for High Returns: Owning an investment property gives you the opportunity to generate significant returns with appreciation over time.
  • Passive Income Stream: You can get a steady cash flow with the help of rental income.
  • Tax Benefits: In some cases, investment properties also offer tax benefits, including deductions for depreciation, mortgage interest, and repairs.

Cons of Investment Property

  • High Initial Deposit: For new investors, in particular, down payments, closing costs, and renovations can be a major financial barrier. As a result, the option for diversity may be limited.
  • Management Challenges: Owning rentals means maintaining them regularly, making repairs, finding tenants, and resolving problems. While this helps, hiring property management raises expenses and lowers revenues.
  • Market Volatility: Real estate is subject to fluctuations in the economy, interest rates, and local trends. Lower rents, occupancy rates, and property values during downturns could reduce your return on investment. 

Bottom Line

Buying investment properties can be a profitable way to invest in real estate, but it does involve risk and requires financial planning. On the bright side, these properties do generate rental income as well as market appreciation.  

Ultimately, real estate investing demands a strategic mindset, financial discipline, and a willingness to navigate challenges. By arming yourself with knowledge and prudent decision-making, you can embark on a prosperous journey as a successful real estate investor. 

At Houzeo, you can find a variety of properties for sale. Our repository includes properties from all across the country.

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Frequently Asked Questions

How to invest in real estate?

Investing in real estate typically involves researching properties, assessing financing options, and conducting due diligence before making a purchase. For a successful investment strategy, consider factors such as location, market trends, and financial goals.

What is an example of an investment property?

Investment properties can be residential, commercial, or mixed. Examples include houses, offices, and apartments.

What are the tax benefits of owning an investment property?

Investment property tax deductions include mortgage interest, property taxes, insurance, maintenance costs, and depreciation. These deductions can significantly reduce your taxable income from rental income.

What are real estate investment risks?

Risks of investment include market volatility, vacancies, difficult tenants, unforeseen maintenance costs, and liquidity concerns. Avoiding these dangers requires a solid plan with backups.

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