Investing in property can be one of the most rewarding choices you’ll ever make over time. However, that requires making smart moves to make sure you’re not losing more than you’re gaining. Before you go and invest on a property, I’m here to tell you all about investment property basics that will hopefully serve as a foundation for you.
An investment property is a purchased real estate property that was bought to be utilized as a source of income either through rental, resale, or both. Investment properties can either be a long-term or short-term project. A short-term investment property project happens when an investor buys real estate property, renovates it, and resells it with intention of making profit. This strategy is called flipping. While flipping is good in some ways because it offers quick returns, it unfortunately requires an extensive knowledge of how the market works.
There are three primary types of investment properties: residential, commercial, and mixed-use. Residential investments are those that include houses, condominiums, or townhouses. On the other hand, commercial properties are those that are intended for business purposes. These include warehouses, office buildings, or retail stores. Commercial properties are typically more costly than a residential property because of maintenance and improvements. Lastly, mixed-use properties are those that are both a commercial and residential property. For example, the main floor of the building may serve commercial purposes, such as a store or restaurant, while the upper floors are intended to be residential units.
Despite a good number of financing options, coming up with the finances needed for an investment property can be difficult. Insurers do no offer mortgage insurance so a borrower must be able to present at least a 20% deposit to obtain financing from the bank for an investment property. Another thing is that an investor must present good credit scores in order to be approved for an investment property mortgage.
Because investing in property may be a source of income, it has to be reported to the Internal Revenue Service (IRS). If an investor receives rent from the properties, they must report it as income, but relevant expenses related to the property can be subtracted from it. If an investor flips a property and has a capital gain, it must also be reported to the IRS. Capital gain can be calculated as the selling price minus purchase price and improvement costs.
There are a lot of real estate investment opportunities out there. However, you must be willing to wait for the right opportunity and be equipped with the right tools, and by tools, I mean knowledge, finances, and the like. The perfect opportunity doesn’t appear every day so you always need to be ready to strike the moment you see it.