What Are Investment Properties?

The ins and outs of real-estate investing

As interest rates moved to historically low levels the past few years, it became more feasible for individuals to purchase investment properties. Investment properties are a type of real estate that you acquire, often leveraged, where you don't intend to live.

Rather, you rent to others producing income that ideally will cover your mortgage payment on the property. As prices have increased due to strong demand, it has become more difficult to find investment properties that produce positive cash flow.

Real-estate investing is different from buying your own home in several ways. First, banks and other private lenders want you to have more equity in the property. Thus, the down payment tends to be higher, often 25 percent or more. Bankers generally only count half of the rental income on the property when calculating the gross debt service ratio on the mortgage application. You'll need to have sufficient income and net worth to make up the difference. Lastly, you'll need to educate yourself about the landlord and tenant laws in your state. If you don't, you might find yourself in a legal as well as a financial mess.

Investment properties involve greater hands-on management than buying mutual funds or ETFs. While leverage and the tax benefits associated with them are attractive, it's definitely not a passive investment. If you're not prepared to roll up your sleeves on occasion to get something fixed, it won't be a pleasurable experience. Real-estate investing should be for the long term, using time and inflation as your allies.

Those who make real money buying investment properties do so because they have a system in place that works for them - one that can be duplicated and is proven successful. By sticking to a plan at all times, real-estate investing can be extremely rewarding. Unfortunately, like investing in general, the best way to learn is through practical experience. Making mistakes always speeds up the learning curve, especially if they are expensive ones. Don't be afraid to make them. They'll give you incredible insight for your future investments.

Types of investment properties can range from single-family homes to multi-family dwellings, all the way up to large apartment buildings. Often, investors work their way from smaller properties to larger ones as they gain experience dealing with tenants, renovations, etc. Go slow and smart debt can work in your favor, especially when it comes to buying investment properties.

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