There’s a big difference between owning your own home to live in and owning an investment property. An investment property is a real estate asset you use only for investment purposes. You must occupy a property for at least 14 days or 10% of all the days the property is rented to call it a residence. If you occupy it less, you’ll need to claim it as an investment property on your tax returns, according to the IRS.
An investment property is also not a fix and flip, which is when you buy a property, renovate it and hope to sell it for a premium. These projects can be profitable. You hold them for a shorter time than you would an investment property. An investment property is held with the goal of receiving rental payments and long-term appreciation.
Take a look at why investment properties are a worthwhile venture and how you can get started.
What are Investment Properties?
Investment properties are real estate properties that are purchased with the intention of generating income or profit. These properties are not primarily intended for personal use or occupancy but rather for investment purposes. Investment properties can take various forms, including residential properties (such as houses, apartments or condominiums) or commercial properties (such as office buildings, retail spaces or industrial properties).
The main goal of investing in these properties is to generate rental income from tenants or to profit from the appreciation of the property's value over time. Investors may choose to buy investment properties to diversify their investment portfolio, generate passive income or take advantage of potential tax benefits.
Investment properties can be managed and operated by the owner or by hiring a property management company. The success of an investment property depends on various factors, including location, market conditions, property management, rental demand and the overall economic climate.
Rewards of Investment Properties
Investment properties offer a host of unique benefits. They’re great sources of:
Passive Real Estate Investments
You’ll still have to put in the effort to find tenants and take care of necessary repairs or renovations. But once everything is taken care of, you can sit back and count on a steady cash flow coming in every month. You’ll also have the benefit of capital appreciation if your property increases in value over time. These factors are what make investment properties appealing assets to own.
Diversification
Investment properties are a great way to diversify your portfolio, particularly if you’re currently invested in stocks, bonds and exchange-traded funds (ETFs).
Tax Benefits
You need to report rental payments as rental income on your tax return. You also must report capital gains to the IRS if you sell an investment property for more than the price you paid. Investment property owners are able to deduct various expenses from their tax returns, including mortgage interest, repair costs, physical wear and tear and the cost of finding tenants. Make sure to consult a tax professional for all the details.
Risks of Investment Properties
Every investment comes with a different degree of risk. Investment properties aren’t immune to this rule. To own a successful investment property, you’re going to have to prepare for the risks. These include:
Lack of Liquidity
Real estate is not the most liquid asset to invest in. In an emergency, you can sell stocks or bonds and receive cash in return pretty quickly. Real estate takes longer to sell. In some cases, properties can sit on the market for weeks or months. Be prepared for your investment to be locked up.
Learning Curve
The most successful investment properties are born out of years of expertise. It takes time to learn about the market and to find the best business model. Knowing how to spot an up-and-coming neighborhood, which maintenance tasks to outsource and which contractor to trust can take a while to learn.
Landlord Responsibilities
Being a landlord requires extra effort. It can be time-consuming and even strenuous for some people. Landlords have to find tenants and screen them thoroughly. Some tenants may not pay rent on time or may damage your property. You’ll be responsible for maintenance work tenants may need. While you can hire a property manager to help out with basic tasks, it will come at a cost. You’ll need to figure out the best way to maximize your time and expenses.
Management Fees
Fees come with investment in crowdfunding real estate investment platforms and real estate investment trusts (REITs). Some platforms can charge high management fees or other types of fees. It’s a good idea to have a chat with a platform adviser to ask questions and read the prospectus before you invest. Be sure to ask about fees.
Returns Are Not Guaranteed
With any investment, there’s no way to know for sure when your investment will pay off and how impressive the returns will be. This is especially true for crowdfunding real estate investment platforms. Although many advertise average returns, these are never a guarantee for future returns. There’s a chance the platform’s investments could fail. Make sure you understand how your money will be protected even during a worst-case scenario.
When to Invest in Property
Investment properties used to have high barriers to entry. You needed to have a lot of capital on hand to enter the market. This isn’t the case anymore. Whether you’re a recent college graduate or a retired professional, you can take advantage of real estate investing now.
Technology and regulations have made it easier for everyone to get involved.
Many online platforms pool your money with that of other investors — crowdfunding. Many crowdfunding platforms let you begin investing for as little as $1,000 or even less.
Best Platforms for Investing in Property
The rise of online platforms has made real estate investing more accessible than ever before. Here are some of Benzinga’s favorites.
1. DiversyFund
DiversyFund is a crowdfunding real estate investment platform that operates its own real estate investment trust, the DiversyFund Growth REIT. When you create an account with DiversyFund, you can start investing in its REIT for as little as $500. There are no platform fees. You can also invest in DiversyFund itself (for accredited investors with a minimum of $25,000).
DiversyFund invests in real estate that can be sold within approximately five years. The company maintains several cash-flow properties in the portfolio and generates rent revenue. When the market turns advantageous, Diversyfund sells the asset and you receive your principal back — plus returns.
2. CrowdStreet
CrowdStreet Marketplace is a platform that connects investors with real estate opportunities. CrowdStreet allows investors to get in on real estate deals directly, which can maximize the potential for returns.
Investors can also invest in funds or seek out advisory services. The platform has a steep minimum of $25,000. The majority of offerings on the CrowdStreet Marketplace have a minimum of $25,000, though some may range up to $100,000.
Create an account to begin browsing real estate deals and start investing.
3. Roofstock
Roofstock is an online marketplace for single-family investment properties. Investors can buy and sell properties, portfolios and shares of rental properties in a single place. There is a one-time management fee of 0.05% when you complete a transaction.
To get started, you’ll need to create an account and apply to be preapproved with a mortgage lender. Once you’ve been preapproved, you can start investing by bidding on properties or offering the list price. You also have the option to buy shares of rental homes. Shares require an investment minimum of $5,000.
4. Streitwise
Streitwise offers an online commercial REIT platform. Streitwise manages its own private portfolio of real estate assets. Investors can invest in the managed portfolio through the online platform. You can get started for as little as $1,000 and expect to receive a dividend target of 7.2% for 2023.
There’s a one-time fee of 3% when you first invest and then you can expect to be charged 2% every year afterward.
Get the Right Investment Property
Taking out a mortgage for your investment property is not the same as taking out a mortgage for a home you plan to live in year-round. You should expect to put down a larger down payment and be charged higher interest rates. Oftentimes, the approval requirements will also be different. You will need to consult with your mortgage provider to get all the details.
It can be a bit difficult to secure financing for an investment property. This is one of the reasons why REITs and real estate investment platforms can be a great resource. Whether you choose to buy an investment property yourself or invest with an online platform, real estate can be a worthwhile investment that can bring solid gains and diversify your portfolio.
Frequently Asked Questions
Is rental property a good investment?
The success of rental property as an investment depends on factors such as understanding the real estate market, acquiring properties at a reasonable price and effectively managing them. It can provide passive rental income and potential capital gains, but there are also risks involved, such as vacancies and unexpected expenses. Market conditions and potential risks should be thoroughly researched before making investment decisions.
Is running a rental property a lot of work?
Running a rental property involves finding tenants, managing maintenance, collecting rent and addressing legal issues. It requires time, effort and attention to detail.
What kind of loan do you get for an investment property?
An investment property loan, also known as a rental property loan, is a type of loan specifically for purchasing a property to generate rental income or profit through appreciation. These loans typically require a larger down payment, have higher mortgage rates and enforce stricter eligibility criteria compared to traditional home loans. It is recommended to consult a financial adviser or mortgage lender to find the best loan option for your investment property goals and financial situation.
