What is an Investment Property and Should You Buy One?

When starting in the career of real estate, there are many paths that can be taken.

One of the most common paths is to invest in investment properties.

There are many different kinds of investment properties and each one has its pros and cons as well as its special characteristics.

In this guide, we will be going over all aspects of investment properties, including what they are, how they are purchased, and much more.

To begin, lets go over what constitutes an investment property.

What Is An Investment Property?

The specific definition of an investment property is any property apart from a primary residence that is purchased in order to generate income.

This income could be in the form of either rental income or from reselling the property, or both. Although these properties can be owned by individuals, they are often purchased and managed by groups of real estate investors or a separate legal entity operated by investors.

However, there are many different kinds of investment properties, and it could be difficult to decide which investment property is the best one.

Below, we have listed some of the most common investment properties that typically make up an investment portfolio.

Residential Investment Property

The most common form of investment properties for the typical real estate investor is a residential property.

A residential property is essentially an investment property where people live or stay. Some examples of residential properties include:

• Single-family homes
• Multi-family homes
• Mobile homes
• Condos
• Vacation homes

Residential real estate investors make my by collecting rent payments from the tenants, reselling the property for more than what they bought it for, or both.

Pros

• Big potential to generate rental income in the form of positive cash flow
• Can always sell property at an appreciated value
• Various tax benefits

Cons

• Can be expensive to begin
• Managing properties yourself can be time consuming
• Little liquidity

Commercial Investment Property

Another very common form of a real estate investment is in commercial real estate. Commercial real estate is a space that is rented or leased by a business with the purpose of running a business inside.

Some examples of commercial properties include:

• Office buildings
• Shopping centers
• Malls
• Gas stations

…and any other kind of building that is used for business purposes.

Commercial properties also encompass other properties like industrial and retail real estate.

Industrial real estate refers to properties that focus more on manufacturing or housing goods. On the other hand, retail real estate typically refers to where goods and services are sold.

Pros

• Potentially higher returns compared to residential
• Profitability of the property typically depends on the business being housed
• Dealing with businesses can be easier than residents

Cons

• Run the risk of having the public going through the property all the time
• Can be more time consuming
• More risk involved with public property

Land

Another example of property that can be defined as an investment property is land. This can refer to either raw land or developed land, like farmland.

Many raw land investors lease their properties to farmers for agricultural purposes or seek out properties with potential for future development to sell at a higher price.

Pros

• Easier to acquire and lower in cost
• Not very costly to maintain
• Many options

Cons

• Few tax advantages
• May not be immediately profitable
• Zoning can be complicated

These are a few of the most common types of investment properties but there can be many more to choose from.

So, now that we know about some of the different options, lets find out more about how to go about purchasing an investment property.

Should you invest in property?

Although the process of purchasing an investment property can vary depending on the kind of property, they all follow the same general steps.

Before getting into the actual process however, it's important to be sure that you are ready to buy an investment property. Below, we have outline some of the characteristics of someone who is prepared to buy an investment property.

Financial Stability

One of the most important characteristics that someone interested in investment properties should have is financial stability. Investment properties require a lot more money than a traditional primary residence, especially if you plan to rent it out to tenants.

To fully be able to purchase an investment property, you should have enough money in your budget to cover initial costs, like:

• Investment property loans
• Down payment
• Inspection
• Closing costs

All of these costs make buying an investment property a very expensive endeavor. And, apart from those immediate, up-front costs, investors have to consider how they are going to pay back the investment property loan.

This means that the investor has to have a way to pay the investment property mortgage payments while still paying the payments for their primary residence.

Existing ROI

Another important characteristic that is important when purchasing an investment property is that it has potential return on investment (ROI).

It is important to have this ROI because an investment property that does not have any return will cause the investor to lose a lot of money. That is why many investors choose to calculate the approximate ROI.

If the property has a positive potential ROI, then that means that the investor will most likely get their money back (and more) after purchasing the property.

Time Management

Finally, it is crucial that the investor has the time to manage the investment property.

Managing an investment property on your own is a very difficult and time consuming task. There are a plethora of tasks that all property managers have to deal with and many people do not have the time for it.

This is why a lot of investors choose to hire a property manager or invest in property management software.

If you have all of these characteristics, then you are probably prepared to purchase your first investment property.

Below, we have outlined some of the common steps that need to be taken to purchase an investment property.

How To Purchase An Investment Property

Purchasing an investment property can be a complicated task. That is why we have outlined some of the most common steps to purchasing an investment property down below.

Choose A Location

Choosing the location of an investment property is incredibly important. There are many factors to consider when choosing the location of an investment property, including:

• Revitalization
• Crime rate
• Property taxes
• Public transportation
• Job market
• Schools

…and much more.

After choosing the location where you would like to purchase the investment property, it is time to choose the property.

Choosing The Property

Now that you know where you want to purchase an investment property, it's time to choose what property you will purchase.

It is important to consider all of the pros and cons that were listed above for each type of investment property. You should also do plenty of research and analysis to find the type of property that best meets your needs and your goals.

After finally choosing the right property in the right location, you can begin the process of purchasing that specific property.

Get The Property Inspected

In real estate, it is never a good idea to purchase property without having it inspected first. This is why the next step in the process of purchasing the property is to have the property thoroughly inspected.

For this step, it may be a better idea to hire a professional inspector to inspect the property. This is especially true if it is your first time purchasing an investment property and are not sure what to check.

Some of the things that you want to make sure get inspected include:

• Foundations
• The roof
• Plumbing
• Electrical systems
• HVAC
• Appliances

…and anything else that stands out.

After the inspection, the inspector will provide a list of their findings and, depending on the results, you may change your mind about the specific property.

Submit an Offer

After inspecting the property, if you are happy with the results, it is time to submit your offer.

This part of the process can make or break the purchase. Since there are so many people looking for properties, it can be difficult to stay within your budget when placing an offer.

At this stage, it is important to explore your choices. Some people choose to negotiate heavily to try and getting the lowest price possible. However, some people simply give their best offer upfront and, if they're not accepted, they walk away.

Decide What To Do

Congratulations! You are now the proud owner of an investment property! From here, there are a couple of different paths that you can take with it.

Typically, an investment property is either fixed up and flipped, or it is rented out to tenants for monthly income. Whichever path you choose, its just important that you do what's best for your personal and financial goals.

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