When it comes to defining real estate investment terms, always remember to keep it sweet and simple. For example, an income property is a property bought or developed to earn income. Of course, this sounds too good to be true. That’s because when investing in real estate there are significant factors to consider. For example, should you be investing in income properties at the beginning of 2018? We all know that real estate investing is like a roller coaster ride and comes with many twists and turns. Year after year so many things change in the real estate world. But if there’s one thing real estate investors know for sure, it’s investing in income properties. You see, real estate is such an inefficient market; it’s possible to find awesome bargains with a very high return on investment. And if you can manage the property yourself, you can collect more income. If you purchase the right property at the right price and on the right terms, a rental property can produce significantly more income than traditional passive investments.
Many people refer to residential income properties as “non-owner occupied”. A mortgage for a “non-owner occupied” property may carry a higher interest rate than an “owner occupied” mortgage as it is viewed by lenders as a higher risk. A common practice during periods of home price appreciation is for investors and speculators to purchase residential income properties with the intent that rents will cover their monthly expenses for a period of time until the property can be sold for a large capital gain. As with all markets during times of fast price appreciation, and as with all market bubbles, those that enter the market first and get out first usually do well. Those that enter the market later and get out last usually don’t do as well.
So one reason why you should be investing in income properties is that YOU are in control of the income property! When you decide to invest in income properties, you become your own boss. You choose what property to invest in, what tenant you will rent to, how much you will charge in rent and how you will manage and maintain the income property as a whole.
There are many different types of income-producing properties that you could invest in. Here is a brief list of 7 common types of residential income-producing properties:
- Single Family: An owner or non-owner occupied property designed for the use and occupancy of one family group.
- Duplex: A building that contains exactly two separate dwelling units.
- Triplex: A building that contains exactly three separate dwelling units.
- Quad-plex: A building that contains exactly four separate dwelling units.
- Multi Family: A building or complex that contains five or more separate dwelling units. Any building over five residential units will be considered “commercial” for lending purposes but “residential” under IRS Tax Code when calculating for straight-line depreciation.
- Apartments: One or more rooms of a building used as a place to live, in a building containing at least one other unit used for the same purpose. Again, same lending requirements as with the multi-family property type above.
- Vacant Land: Property or real estate, not including buildings or equipment.
Now that you’ve familiarized yourself with the different types of income-producing properties, let’s list the various tips and pieces of advice that will guide you in buying income properties.
Tip #1: Consider the different ways that real estate can provide income.
First, you can buy income properties with the intention of renting them out to generate monthly income from renters. Or you can buy a property as a ‘fix-up’ which you can then sell for a profit. Finally, you can purchase a property with the intention of letting it sit for a time until the market takes a turn and the value improves, at which time you sell it for a profit. Figure out which method you want to use for producing income with your real estate purchase so that you know what kind of home you’re looking for. After all, you don’t want to buy something that really needs to be fixed up if you’re planning on renting it out right away.
Tip #2: Do your math.
If you’re going to purchase real estate with the sole purpose of earning money from it, then you need to look carefully at your financials. Know in advance what you can afford. Figure out which loans are right for you with consideration of the amount of time that you might be paying interest on those loans. Figure out realistically what kind of profit you are likely to make over time. While it can be tempting to buy income properties that look good, purchasing with income-generation in mind means looking more closely at the budget.
Tip #3: Look at the non-financial costs.
Consider what buying income properties will mean in terms of your time. If you’re going to rent the property out, you will need to get and keep tenants, collect rent, make regular repairs and provide other on-site services that will take up your time. If you’re going to fix the property up and sell it, there will be a short period of time during which the house will need most of your attention. Make sure you have the time and not just the money.
Tip #4: Follow real estate trends.
Before buying income properties, you should spend some time studying the real estate trends in your area. This will give you a good idea of when the market is right for buying and later for selling and it will also help you make decisions about what neighborhoods to buy in and what types of investment properties are earning money. You don’t want to come in at the end of a trend when it’s starting to go out of style so make sure you’re on top of your game. For the latest real estate trends check out Masvisor and read all about it!
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