- December 11, 2021
- Posted by: Robert Brown
- Category: Investing
Any property that is obtained with the purpose of gaining and expecting returns is classified as investment property. Investment property can be in the form of an apartment building, single-family dwelling, a vacant lot or a commercial property. It is essentially any type of real estate. The term investment property usually pertains to the property that the owner does not occupy though in certain instances the owner may occupy a portion of it.
Examples of investment property as follows:
• Land held for undetermined future use
• Vacant building to be rented our under an operating lease
• Any property that is currently constructed or developed for future use
• Land held for any long term appreciation
Buying a property can be a lucrative venture, whether bought as a home or as a business venture. A beginner’s approach is to purchase a multiple unit dwelling as an investment property. You can live in one unit while renting out the remaining units. In this way, you can earn from your renters and at the same time use the rent money for mortgage payments. In the long run when the property is fully paid, the owner still enjoys collecting rent for a profit.
As a property owner, you can use any equity you have in your properties to finance further property purchases. When we say equity, it pertains to the fair market value of the property less your existing liabilities inclusive of any liens. It is a common practice to borrow against the equity in a property. Rates for these types of loans are somewhat competitive because your property will serve as collateral in securing your loan. Keep in mind that the less risk there is in lending, the better rates you are going to be offered.
Sometimes an investment property is bought at a tax sale. When the original owner fails to honour the property tax payment for certain period of time, the property will be auctioned. It may start at a minimum bid which will be high enough to cover the back taxes and other related expenses incurred during the sale. It can still allow the investor to buy the property at a relatively minimal cost. This is an example of an investment property as it gives the new owner the opportunity to resell it at market value, renovate or upgrade the property and sell a premium price or to hold and rent out bringing in a regular income and the hope of capital gain.
To measure the return on investment you add up your cashflow from rent or resale and subtract any costs such as taxes, mortgage and insurance. You then divide this by the total amount invested which could be purchase price plus renovations. Multiply this by 100 to give you a percentage. If you are purchasing for resale then this will be calculated once but if you are renting out the property this is normally measured on an annual basis. The return on investment calculation will give you an idea of whether the property is worth purchasing or if there are any better deals out there.