Property which is purchased with the sole intent of using it to gain financially is called an investment property. It is not intended for the owner to use as a residence, though in the case of a multi-family property purchase, the owner may sometimes reside in one of the units, while renting out the others. The types of property to be invested in can be a single or multi family unit, including duplexes, condominiums and apartment buildings; it can also be unimproved land.
Investment properties are also occasionally purchased as fractional properties, whereby a group of individuals collectively own a property and each investor owns an interest in the property and is entitled to the same use and rights of the property as every other investor, regardless of his investment percentage. Income and expenses in this type of investment property are usually proportionate to the ownership share. That is, the higher your share in the property, the higher your income and expenses.
Investing in property is an ideal way to preserve an asset base, grow wealth and hedge against inflation. There are several ways to profit from investment properties, including regular cash flow from income streams, property appreciation, whether the property is flipped, meaning that it is rehabilitated by the investor and quickly resold, or held long term, leveraging the equity in one property to buy additional investment properties, and for the tax incentives derived. While some investors will avoid properties that generate negative cash flows, meaning that the rental steam is inadequate to cover the monthly carrying costs, i.e. mortgage and maintenance costs, generally properties that have negative cash flows tend to appreciate at a higher rate than its income producing counterparts.
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It’s important for an investor to understand not only their investment goals, but exactly what their investment goal time horizon is, since each investment property will generate revenue at a different rate of return and cycle.
Property investment is a business, and the investor should understand that the benefits derived from it are often offset by the challenges, including property management difficulties such as dead-beat tenants, evictions, high turnover or high vacancy rates. Furthermore, investment property is also susceptible to the market conditions, and in a soft market, an investor may find that investment related expenses are higher than the revenues generated by them.