Investment property refers to real estate acquired with the primary purpose of generating income and/or capital appreciation rather than for personal use. Investing in property can be a lucrative strategy for building wealth and creating a passive income stream. However, understanding the different aspects of investment properties, including financing options and types of properties, is essential for making informed investment decisions. In this article, we will explore the definition of investment property, financing methods, and the various types of investment properties available to investors.
Definition of investment property:
Investment property is a real estate asset purchased with the intent of generating returns through rental income, property appreciation, or a combination of both. Unlike a primary residence, investment properties are not used for a personal living but are considered a business venture to generate profit.
Financing investment properties:
There are several financing options available for investing in real estate properties. Here are some common methods:
Conventional mortgage:
Investors can obtain a conventional mortgage from banks or financial institutions to finance an investment property. Typically, these mortgages require a larger down payment (usually 20% or more) compared to owner-occupied mortgages.
Cash purchase:
Some investors choose to purchase investment properties with cash. Paying in cash provides the advantage of avoiding interest payments and may present better negotiating power with sellers.
Hard money loans:
Hard money loans are short-term, high-interest loans often used by real estate investors to finance the acquisition of investment properties quickly. These loans are based on the value of the property and the investor’s equity, rather than the investor’s creditworthiness.
Types of investment properties:
Residential rental properties:
Residential rental properties include single-family homes, condominiums, townhouses, and multi-unit properties such as duplexes, triplexes, and apartment buildings. Investors can generate income from these properties by renting them out to tenants.
Commercial properties:
Commercial properties comprise office buildings, retail spaces, warehouses, industrial facilities, and mixed-use developments. Investing in commercial properties can yield higher rental income, but it may require a deeper understanding of the commercial real estate market.
Vacation rentals:
Vacation rentals, such as beach houses, cabins, or condos in tourist destinations, offer investors the opportunity to generate short-term rental income from vacationers and travelers.
Real Estate Investment Trusts (REITs):
As mentioned in a previous article, REITs are companies that own and operate income-generating real estate assets. Investors can buy shares of publicly-traded REITs on the stock market, providing a hassle-free way to invest in a diversified real estate portfolio.
