What is Investment Property?
Investment Property refers to the real estate property acquired to earn returns on the investment in the form of rental income, royalties, dividends or future appreciation and is not a primary residence of the investor. Such properties may be in the name of an individual investor, a group of investors or an investment company, and it can either be a short-term or a long-term investment.
In case of short-term investment, the investor often engages in flipping wherein a real estate property is purchased, renovated and then sold at a profit within a brief period.
Types of Investment Property
It can be primarily classified into the following three types:
- Residential: These are rental homes that are one of the most popular ways for investors to earn some additional income. Basically, the investors purchase residential properties, rent it out to tenants and earn monthly rentals. These properties can be either single-family homes, apartments, condominiums, townhomes etc.
- Commercial: These are properties that are usually used as office spaces, shops etc. The investors purchase commercial properties and rent them out for business purposes. The rentals, as well as the maintenance expenses, are higher as compared to residential properties. These properties can be apartment buildings, retail store etc.
- Mixed-use: These properties are simultaneously used for both residential and commercial purposes. These properties may have a retail storefront on the ground floor and residential units on the upper floors.
Let us take the example of David, who purchased a property in the city for $500,000 five years back. During this period, he rented out the property to a couple at $25,000 per annum. At the end of the five years, the couple decided to buy the property for themselves, and they agreed to pay David a sum of $650,000 for the house. During the 5 years, David had to spend $20,000 for maintenance and repair. Determine the profit earned by David on this investment property.
- Purchase price = $500,000
- Maintenance and repair expenses = $20,000
- Rental income = $25,000 * 5 = $125,000
- Sale price = $650,000
Now, the profit earned by David can be calculated as,
Profit = (Sales Price + Rental Income) – (Purchase price + Maintenance and Repair Expenses)
- = ($650,000 + $125,000) – ($500,000 + $20,000)
- = $255,000
Therefore, David made of a profit of $255,000 over a period of five years.
What is the best Investment Property to buy?
The best investment properties should exhibit some (if not all) of the following features:
- High rental yield and yet affordable for tenants;
- Low maintenance expenses along with the adequate quality of amenities;
- The low purchase price, which may be possible in case of booking during the project launch;
- Sites situated in prime locations;
How to Identify an Investment Property?
One can use the following channels to identify good investment –
- Real Estate Agent: These agents can be of great help as they have access to off-market investment properties via pocket listings, where the brokers or real estate agents hold exclusive right to sell the subject properties that have not been posted anywhere else.
- Local Wholesalers: They can be a valuable source of off-market. These local wholesalers are real estate investors who negotiate exclusive right to buy the properties with the sellers and then sell that contract to a buyer at a higher price, thus booking the difference in price as profit.
- Popular Real Estate Websites: This is one of the most effective of the available free routes to find investment properties. The interested investors can search online at various real-estate specific websites, such as Craigslist, Zillow etc. and shortlist properties according to their preferences.
- Courthouse Auctions: These courthouse auctions can be another great option to find investment properties, that too at an attractive price. These properties are usually part of tax sale or foreclosure and are required to go through public auctions. Typically, these properties are available at a price that is far below the market value.
What makes the property an Investment Property?
A property has to satisfy the following conditions to be classified:
- Held to generate income through capital appreciation or rental or both
- Not occupied by the owner;
- Not employed in the owner’s ordinary course of business;
This article has been a guide to investment property and its definition. Here we discuss its types, example and how to identify profitable investments. You may learn more about financing from the following articles –