To investors, few sensations are as exciting as closing a deal on a new investment property.
They know that investing in real estate has numerous advantages over pooling money into traditional stocks, bonds, mutual funds, and other securities. It’s one of the best wealth-building strategies out there, and more and more investors are looking to get their feet wet.
Here’s a quick guide to investment properties to help you get started.
What is an investment property?
An investment property is real estate you buy to earn a return on your investment. You earn your returns through rental income, property resale, or both.
Typically, you don’t live in your real estate investment, though you can. For example, you may choose to live in one unit of a four-unit house you own.
Some mortgages, such as Federal Housing Administration (FHA) loans, require real estate investors to live in their investment properties in exchange for lower down payments.
What are the different types of investment properties?
There are three types, defined by what investors use them for:
Residential: These are the most popular. Investors buy homes, condos, apartments, and other kinds of residential structures to collect rental income from tenants.
Commercial: Wealthier individual investors, groups of investors, or corporations buy commercial investment properties, such as retail stores, apartment buildings, and other commercial structures, to collect higher returns from leases.
Mixed use: Mixed-use investment properties combine features from both residential and commercial properties, such as commercial structures with ground-level retail units and upper-level residential units.
How do you find investment properties?
A fast and easy way to start looking is online. Popular websites for buying investment properties include Auction.com (specializing in discounted residential, bank-owned, and foreclosure home deals), and Realtor.com (official site of the National Association of Realtors).
Looking online for investment properties has the advantage of showing you what’s available outside of your location. And finding a good location to invest in real estate is key to generating the returns you want.
But if you feel like staying local, you can head to a local Realtor’s office to browse listings.
What are the benefits of real estate investments?
Buying the right investment property generates predictable cash flow, generates wealth through appreciation, generates higher returns through positive leverage, reduces debt through equity buildup, and even reduces your taxes through tax deductions.
Above all, investment properties will make you money while you sleep and pay off their mortgages for you.
How do you buy your first investment property?
Start by assessing how much money you can afford to spend to get the ball rolling. Assuming you don’t plan on buying your investment with 100 percent of your own cash, you’ll need to set aside a down payment.
Most conventional mortgages require a down payment of 20 percent or more, but you don’t have to get a conventional mortgage.
You can get an FHA loan (if you plan to live in your investment property), borrow private or hard money, or even use your IRA. Head over to our guide on investing in real estate to learn more about financing your real estate investment.
Pro tip! Don’t take on more than you can handle at first if you’re investing in real estate for the first time. Start small to keep your upfront costs small, and steer clear of the fixer-uppers!
Do your profitability research. You can assess potential returns on investment (ROIs) on the properties you look at by using this ROI calculator.
And once you’ve found the most promising investment property, have done your profitability research, and have the financing in place, you’re ready to sign the deal.
The bottom line
Investing in real estate is a rewarding venture, but you must tread carefully. Buying property usually means you’re stuck with it, so make absolutely sure you’re going to get your money’s worth out of your investment before you buy.
