Definition
Investment property refers to real estate property purchased with the intention of earning returns through rental income, the future resale of the property, or both. The property might be residential such as houses or multi-family homes, or commercial like office buildings or shopping centers. It does not include owner-occupied residences or property held for use in the ordinary course of business.
Key Takeaways
- Investment property refers to a real estate property that is purchased with the intention of earning a return on the investment either through rental income, the future resale of the property, or both.
- The property can be long-term or short-term investments. Long term investments are acquired for generating long-term cash inflow while short term investments are usually flipped for profit and are held for less than a year.
- Investment properties can encompass a wide variety of property types such as residential, commercial, retail, industrial, etc. However, they require careful management to ensure their profitability and depreciation is also a significant factor to consider in tax implications.
Importance
Investment property is a significant term in finance as it refers to real estate property that has been purchased with the intention of earning a return on the investment either through rental income, the future resale of the property, or both. This includes properties such as residential rental homes, commercial business properties, and undeveloped land.
It is an essential concept as it serves as a key source of profit and income for investors. Proper understanding and management of investment properties can result in capital growth and provide financial security.
Moreover, investment property is also relevant for tax purposes, as the income, expenses, and profits from it can significantly impact an investor’s tax situation.
Explanation
Investment property is primarily acquired for the purpose of producing a return on investment either through rental income, the future resale of the property, or both. Essentially, when an individual or business purchases a piece of real estate not to live or operate in, but to generate tangible financial profit, it is termed an investment property.
This kind of real estate investment strategy can serve several aims such as generating capital gains, securing regular dividends, diversifying an investment portfolio, or securing assets for the future. One common usage of investment property is the buy-to-let strategy, where an investor buys a property to let it out to tenants and earn rental income.
This regular inflow of cash can serve as an additional income stream for the investor or can be reinvested to expand the property portfolio. Another purpose can be buying a property whose value is expected to appreciate over time, thereby offering a considerable return when sold in the future.
Some businesses do this for strategic reasons like future expansions or hedging against property price inflation in areas where they plan to operate. Hence, investment properties serve diverse purposes, all aimed at enhancing the investor’s wealth based on real estate market dynamics.
Examples of Investment Property
Rental Apartments or Residential Homes: A very common type of investment property is residential real estate that is rented out to tenants. For instance, a person might purchase a multi-unit apartment building or a single-family home and rent it out to tenants. The owner earns income through monthly rent payments, and over time, they may also profit from an increase in property value.
Commercial Real Estate: This includes properties such as office buildings, retail stores, warehouses, or industrial buildings. An entrepreneur could purchase a commercial building and then lease the space to businesses. The owner gains profit from the lease payments and potential appreciation of the property’s value over time.
Real Estate Investment Trusts (REITs): This is a more indirect form of property investment. REITs are companies that own, operate, or finance income-generating real estate. Individual investors can buy shares of a REIT on public securities exchanges, similar to buying shares of a company’s stock. This allows investors to profit from real estate investment without having to buy, manage, or finance properties on their own.
FAQ about Investment Property
1. What is an Investment Property?
An investment property is a real estate property that has been purchased with the intention of earning a return on the investment, either through rental income, the future resale of the property, or both.
2. What are the Benefits of Investing in Property?
The benefits of investing in property can range from steady income generation to capital growth over a longer period of time. It’s also often regarded as a safer and more predictable investment compared to others like stocks or bonds.
3. What Factors should be considered when choosing an Investment Property?
Factors to consider include location, facilities, and amenities, potential for rent and capital growth, maintenance costs, and the property’s overall market appeal and saleability.
4. What is Property Appreciation?
Property appreciation is the increase in the value of a property over time. This can occur naturally due to the overall growth of the housing market, or because of specific improvements made to the property.
5. How can I make money from Investment Property?
You can make money from investment property either through rental income, when the rental fees collected are more than the costs of maintenance and mortgage payments, or through appreciation, by selling the property for a price higher than the original purchase cost.
Related Entrepreneurship Terms
- Real Estate Appreciation
- Equity
- Rental Income
- Depreciation
- Cash Flow
Sources for More Information
- Investopedia: A comprehensive resource for investing and personal finance education.
- The Motley Fool: A multimedia financial-services company that provides financial advice for investors.
- Realtor.com: Real estate listings and news for home buyers and sellers.
- BiggerPockets: A social network allowing real estate investors to network and learn.
