For many, getting started in real estate seems like a distant dream. But, what if we told you that the thousand-mile journey starts with one simple step. In real estate, that first step is learning real estate terminology. So, for this article on real estate basics, we are going to address the term ‘investment property’. What is an investment property? How do you make money with it, and what are the different types of investment properties in real estate?
What Is an Investment Property?
Investment properties are income generating assets. In other words, they are properties which you buy with the intention of making money in real estate. As we’ll find out, there are many different ways to make money with investment property and many different investment strategies to apply. But before getting into that, let’s take a look at the different types of real estate investment properties.
2 Types of Investment Properties
When exploring what is an investment property, there are actually a lot of different types of real estate. But most beginner real estate investors or professionals will find that they end up dealing with properties in one of the following categories:
Residential Real Estate
As the name suggests, residential real estate is property used for living purposes. As mentioned, these are divided into even more types like single-family homes, multi-family homes, condos, townhouses, etc.
Commercial Real Estate
Commercial real estate is for business/office purposes. So the tenants don’t live in these investment properties but rather run their business from them.
Related: Residential Real Estate Investing vs. Commercial Real Estate Investing: The Pros and Cons
5 Ways to Make Money with Investment Property
Not only are there different types of investment properties, but there are different ways to make money with an investment property as well. While some involve actually buying/owning an investment, others just have to do with the field of real estate and investment properties in general.
Rental Property
When someone asks “What is an investment property?”, the first answer that usually comes to mind is a rental property. That’s because renting out is one of the most common real estate investment strategies. Essentially, it is when you buy a property and rent it out to tenants in exchange for a monthly payment, which in this case is your rental income.
Now, there are two sub-strategies within the rental strategy. The first one is traditional rentals and the second is Airbnb rentals. Traditional renting is when you rent out to tenants for longer periods of time- typically a year or more. Airbnb rentals, on the other hand, are a form of short-term rentals which are rented out for a few nights to a few weeks. Either way, the investment property is generating money in the form of rental income.
Flipping Houses
Flipping houses, or fix-and-flip, is another way to make money in real estate. This investment strategy mostly depends on the difference between the purchase price of the property and the actual value after renovations (after repair value) which is why it can be so lucrative for property investors.
So, for this particular real estate investment strategy, you want to be buying investment properties which are below market value. These properties are usually in a distressed condition and are either foreclosures or sold through a short-sale. After purchasing the distressed property, you must renovate it in a way that will force its appreciation. Then you sell the asset for a market value price or higher which leaves a profit margin for you.
However, if you are still at the stage where you’re asking what is an investment property, just know that flipping houses may be a bit of an advanced real estate investment strategy for you. Proceed with caution!
Wholesaling Properties
Wholesaling an investment property is one of the best investment strategies especially for a beginner real estate investor. With this strategy, you can make money through property without actually buying it. All you have to do is find a below market value property, assign it to a contract, find a buyer, and enjoy your profit which is the difference between the designated price and the actual end price for which it was sold.
Learn More: Your Guide to Real Estate Wholesaling
Becoming a Real Estate Agent
Becoming a real estate agent is another way of getting involved in the world of real estate investing without purchasing investment properties. As an agent, you provide a real estate service instead of buying actual assets. You work with home buyers, sellers, and real estate investors and help them find investment properties for sale.
Related: Real Estate Questions: How Much Do Real Estate Agents Make?
Becoming a Real Estate Developer
Becoming a real estate developer is the core of investing in real estate. A real estate developer is someone who builds properties from the ground up. After that, they sell these properties to home buyers or real estate investors. However, it takes a more substantial capital to start such projects unless you start a real estate syndication or a crowdfund. It also requires a bit more experience and education so it may not be the first stop in your journey as a first-time real estate investor.
Related: How Much Does a Real Estate Developer Make?
How Do You Know If an Investment Property Is Worthwhile?
While there are ways to make money with investment property without owning one, many people have found a lot of success from ownership. So the question is not only what is an investment property but also how do you know a property is worth the investment. The answer is a combination of the following procedures which you can perform with the use of an investment property calculator:
The Investment Property Analysis
The investment property analysis is a procedure where you calculate the return on investment metrics. These metrics reflect the performance of property and include the calculation of cap rate, cash on cash return, and cash flow.
The Real Estate Market Analysis
The real estate market analysis is a procedure which deals with the location and the market trends of that location. It consists of an analysis of real estate historic data and predictive analytics. It tells you whether the location of the investment property is promising or not.
The Comparative Market Analysis
The comparative market analysis is when you look at other investment properties surrounding yours and perform a comparison based on features and price to make sure you are buying at the right price. You can also use this type of analysis to estimate the potential of your investment property. Let’s say you are investing in rentals and you find a property that passes all the previous analyses. Now, how do you get a glimpse of its performance? Look at similar rental properties within the same vicinity. See how much they rent for and how much cash flow they produce. The more, the better of course.
Now that you’ve learned what is an investment property, Learn How to Find Investment Property for Sale in 15 Minutes.
