Types Of Properties You Can Finance With Investment Mortgages
Building an investment portfolio requires an understanding of the types of properties you can finance, how they can generate equity or income, and how you can create a long-term strategic plan to make your portfolio a healthy, profitable tool for wealth. Making strong choices for your investments means understanding the pros and cons of investment types. Below we’ll outline the types of properties you can buy and why you may (or may not) choose to include them in your investment strategy.
Key Takeaways About Real Estate Investment Properties
Need quick answers in your journey to building a real estate investment portfolio? Here are the key facts you’ll need to get started
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Many real estate investors start their investing journey with rental homes
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Different property types offer different revenue types and frequencies
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Your choice of property can affect the loan programs available to you
Choosing An Investment Property
Knowing your ultimate goal in your real estate investment journey will give you a clear path to choosing the best property type. Do you want to create consistent, ongoing income through your property? Or are you looking to play the long game, building equity for the next generation? Perhaps you want to generate larger sums of money through fix-and-flips. Maybe it’s another combination of those three. In order to meet your goals, you need to understand the pros and cons of each property type. These components will help you decide on your investment strategy.
Working with an experienced mortgage broker and real estate broker like the team at Abo Capital can help you define those pros and cons, and check them against your overall goals. We’ll help you define your short- and long-term financial goals and guide you to the best choice for your investment strategy.
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Types of Properties to Invest In
The options in properties are almost limitless. From short-term rentals, long-term rental homes, fix-and-flip remodel projects, or commercial properties, you have many choices. Here’s an outline of the main types of properties we help buyers finance with investment property loans.
Long-Term Rentals
These homes generally rented out on 12, 18, or 24-month leases, offer steady, ongoing income via rent. The upside to these properties is the guaranteed income once you sign someone into a lease. The downside is managing new tenants and maintenance on the property. These are some of the most common investment property types for new real estate investors.
Retail Properties
Retail properties offer a great option for ongoing rental income. Many investors choose these properties for the variety of tenants you can host to maintain income streams. One downfall of choosing a retail property for an investment is the variables of city planning, traffic, weather, and market conditions that you may be subject to as an owner.
Short-Term Rentals
Short-term rentals, also known as vacation homes, or AirBNBs, are properties that an rented out for short periods, usually for vacations or short stays. The pros of this type of property is the high potential income you can generate from one property. The downside is the amount of time and expenses needed to maintain a property with high traffic and turnover of clientele.
Mixed Use Properties
As cityscapes evolve, many towns are building mixed-use properties. This means one building houses both a residential and retail or commercial space, usually on separate floors. These properties offer a variety of income streams, meaning you manage more, but you can generate more income from one property. This is attractive to many investors because they can purchase one property and create multiple new streams of revenue.
Fix and Flips
These homes can offer large lump sum returns in a short turnaround time. Many investors with an eye for design or a background in construction turn to fix and flip for their first step into real estate investing. If you have experience in managing construction projects, this type of investment may be right for you. Learning your target market and its potential equity growth is pertinent when buying this property type.
Commercial Space
As a property with higher price tags, these options usually open themselves up to larger investors with established portfolios. Commercial spaces can generate longer-term, more reliable rental income. However, finding the right tenants can be a tedious process and can create longer gaps in tenancy while you find the right people or companies to fill your space.
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Key Elements of an Investment Property
Revenue Streams
Revenue is king in real estate investment. Understanding a property’s potential income streams is crucial. For residential properties, consider the number of units and typical rental rates in the area. Can you rent the entire property as a single unit, or will you subdivide it into apartments? For commercial properties, research typical lease rates for similar spaces in the area. Factor in vacancy rates and estimate how often the property might be unoccupied. Analyze any additional income sources, like laundry facilities or vending machines in an apartment building. By thoroughly evaluating potential revenue streams, you can project a realistic income and ensure the property cash flow supports your investment goals.
Equity
Equity refers to the difference between a property’s market value and any outstanding debts on it. In simpler terms, it’s the portion of the property you truly own. For investment properties, equity growth is a key wealth-building factor. Equity can increase through rising property values or by paying down your mortgage. Review recent appraisals of similar properties in the area to gauge potential appreciation. Analyze the loan terms to understand how much equity you’ll build with each monthly payment. Prioritize properties with strong potential for appreciation and loans with favorable terms to maximize your equity stake and future return on investment.
Taxes
Property taxes are a yearly expense levied by local governments. They are typically based on a percentage of the property’s assessed value. For investment properties, factor property taxes into your projected expenses. Research the area’s effective tax rate and estimate annual property tax costs. Investigate whether the property has any exemptions or discounts available for investment properties. Reviewing tax records or contacting the local tax assessor’s office can provide this information. By understanding property taxes, you can ensure your projected income adequately covers all expenses, leaving a healthy cash flow for your investment.
Tenants
Tenants are the lifeblood of your investment property, so understanding how to find and manage them is crucial. For residential properties, research average rents in your area and tailor your tenant selection criteria accordingly. Look for responsible tenants with a strong credit history and stable employment. Screen potential tenants thoroughly, checking references, and running credit reports. For commercial properties, understand typical lease lengths and tenant improvement allowances. Develop a system for managing tenant requests and repairs. Building positive relationships with tenants helps ensure timely rent payments, minimizes vacancies, and creates a successful long-term investment.
Maintenance
Maintenance and repairs are ongoing costs associated with property ownership. Understanding these potential expenses is vital for a realistic budget. For residential properties, consider the age and condition of major systems like roofing, plumbing, and HVAC. Research typical maintenance costs for these systems and factor in potential repairs based on the property’s age. For commercial properties, inquire about routine maintenance needs specific to the property type, like janitorial services or elevator upkeep. Review any existing maintenance records to identify upcoming repairs or replacements. By budgeting for maintenance and repairs, you can avoid unexpected financial strain and ensure your property remains attractive to tenants, minimizing vacancy periods.
Marketing
Keeping your property occupied maximizes return on investment. Develop a marketing strategy that targets ideal tenants for your specific property type. For residential properties, consider online listings, yard signs, or partnerships with local property managers. Highlight the property’s unique features and amenities in your marketing materials. For commercial properties, research industry publications, or online listing services frequented by potential tenants. Price your rent competitively based on current market rates and be prepared to offer incentives for longer leases. By proactively marketing your property and offering competitive terms, you can minimize vacancy periods and ensure a steady stream of income for your investment.
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How To Evaluate A Property’s Potential Income and Equity
Savvy investors know how to analyze a property from several points of view to come to a conclusion about its value. Here are the components we help you review when finding an investment property.
Market Trends
Don’t be fooled by curb appeal alone! Smart real estate investors leverage market trends to assess a property’s true income and equity potential. Start by analyzing current market conditions. Is the investment property market booming, experiencing steady growth, or showing signs of a cool-down? Scrutinize data on recent sales in your target area. Look for trends in closing prices to understand how quickly properties are selling and at what value. Rental rates and vacancy rates are equally important. Strong rental rates indicate healthy demand, while low vacancy rates suggest a competitive market where your property is likely to be occupied quickly and consistently. By understanding these market trends, you can estimate realistic rental income and predict future property value fluctuations, making data-driven decisions that maximize your investment’s potential.
Location, Location, Location
Location isn’t just a cliché in real estate, it’s the foundation of a strong investment. When evaluating a property’s potential income and equity, look beyond the structure itself and delve into its surroundings. Are there desirable amenities nearby, like schools, parks, or public transportation? These features attract tenants willing to pay premium rents and can shorten vacancy periods. Furthermore, investigate the area’s overall trajectory. Is it a growing neighborhood with new businesses and development? Or is it experiencing a decline? Understanding the location’s future outlook is crucial. Properties in growing areas are more likely to see rising property values, boosting your equity stake in the long run. By prioritizing the right location, you position your investment property for success, generating healthy rental income and reaping the rewards of potential appreciation.
Scope Out The Neighborhood
Understanding the specific neighborhood where a property resides is vital for assessing its income and equity potential. Research the demographics of the area. Is it a vibrant hub for young professionals, a family-friendly enclave, or a tranquil haven for retirees? Matching the property type to the target demographic helps you predict tenant demand. For example, a multi-unit property might be ideal for young professionals seeking a social atmosphere, while a single-family home might attract families prioritizing safety and good schools. Furthermore, explore the crime rate and overall safety of the neighborhood. Tenants prioritize secure living environments, and a higher crime rate could translate to lower rental income and difficulty attracting qualified renters. By factoring in neighborhood nuances, you’ll gain valuable insights into tenant preferences and potential long-term property value within the community.
Estimating Rental Potential
Estimating your potential rental income is a crucial step in evaluating an investment property.
While a property manager can provide a more precise estimate, here’s a do-it-yourself approach to get you started. First, research rental rates for similar properties (size, bedrooms, bathrooms) in your target neighborhood. Look for online listings, and rental platforms, and consult local property managers to gather data on advertised monthly rents for at least 3-5 comparable rentals.
Next, consider if your property offers unique features or amenities that might justify a higher rent compared to similar listings (in-unit laundry, parking, balcony). Conversely, if renovations are needed or the location is less desirable within the neighborhood, you might need to adjust your rental rate expectations downward.
Vacancy rates also play a role. Research average vacancy rates in your target area, which represents the percentage of time a rental property is likely to be unoccupied. Multiply the average vacancy rate (as a decimal) by your estimated monthly rent to get an idea of the potential rental income loss due to vacancies.
Finally, calculate your gross rental income. Take your estimated monthly rent and multiply it by 12 (number of months in a year).
Then, subtract the estimated vacancy rate loss you calculated earlier. This will give you a starting point – the gross rental income. Remember, ongoing expenses like property taxes, insurance, maintenance, and property management fees (if applicable) need to be factored in to determine your net operating income (NOI) – the true profit generated by the property.
Quotes Are Cool, But Real Rates Are Better
The experienced team at Abo Capital will run your numbers and get you an accurate rate estimate to help you make an actionable mortgage plan. With a deeper understanding of all your numbers, we can guide you to the best mortgage choice for your short- and long-term goals.
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FAQs About Investment Property Types
What type of property is best for investment?
There are many property types to choose from when you want to dip your toe into real estate investing. Depending on your goals, you may want a long-term rental, multi-unit residence, or a retail space. A mortgage broker can help you define those goals.
What type of investment property is most profitable?
Profitability depends on how and when you want to receive revenue. Residential rentals offer ongoing income, but the revenue tends to be smaller than the larger payouts commercial properties can offer.
What's the most in-demand property type?
Since everyone needs a place to live, rental residences tend to be in constant demand. Investing in rental homes can be a great first step to building a real estate investment portfolio.