Definition:
An investment property is a real estate purchased with the goal of earning a return through rental income, future resale, or both. It is not used as the owner’s primary residence.
Example:
Lena buys a small duplex and rents out both units to tenants. She doesn’t live in the property herself but collects monthly rent, making it an investment property.
Explanation:
Investment properties include residential homes, condos, apartment buildings, or commercial spaces that are bought to generate income or appreciate in value. The owner may rent the property out short-term or long-term, and in some cases, hold onto it for resale at a higher price later.
Unlike a primary residence, investment properties are viewed differently by lenders. They often require:
- A larger down payment (typically 20–25%)
- Higher interest rates
- Stronger borrower qualifications
- More cash reserves to cover potential vacancy or repairs
In many cases, buyers can use the estimated rental income to help qualify for the mortgage, especially if the property already has tenants. Real estate investors may also benefit from tax deductions, such as those for mortgage interest, repairs, and depreciation.
Property management may be handled directly by the owner or outsourced to a professional company.
Why is Investment Property Important in Real Estate Transactions?
Investment properties are important because they offer a way to build long-term wealth and passive income through real estate. For buyers, knowing how investment property loans differ from primary residence loans helps avoid surprises during the approval process. For sellers, understanding investor motivations can help in pricing and negotiation. In both cases, the potential for income and appreciation makes investment properties a valuable part of real estate transactions.