What Is an Income Property?
An income property is a property bought or developed to earn income through renting, leasing, or price appreciation. An income property can be residential or commercial. Residential income properties are commonly referred to as "non-owner occupied." A mortgage for a "non-owner occupied" property may carry a higher interest rate than an "owner-occupied" mortgage as lenders often view it as a higher risk.
Understanding Income Property
An income property can be a good investment for a variety of reasons. It offers an alternative to standard market investments in stock equity and company bonds. Additionally, it offers an investor the security of real property with many investment diversification benefits.
Investing in real estate for income requires a broad range of considerations. Interest rates and the housing market environment are top considerations for real estate investors. Location, rent levels, and the potential for return are usually also leading concerns for an investor seeking to buy and rent a property for income.
If after doing property due to diligence an investor identities a property they wish to invest in, then they will typically need to obtain a mortgage loan for the property. Income property investors generally need to be high credit quality borrowers with steady incomes for which to make monthly installment payments. For many investors, the most common type of loan for a real estate property will be a conventional bank loan. This will require a standard credit application that will analyze a borrower’s credit score and credit history in the underwriting process. An underwriter will provide a loan offer with a specified interest rate, principal value, and duration based on the underwriting analysis. A down payment will typically be required and can significantly help to reduce the installment payments overall.
Return on Investment
A real estate property can be an excellent long-term investment that can even provide a source of income in retirement. However, income properties require a great deal of analysis to ensure that steady cash flow is available throughout the life of the loan and beyond. Thus determining a base rate of income to charge rental tenants will be important in obtaining the desired rate of return. Generally, an income property owner will need to analyze the current rate for rent on similar properties in the area while also considering the monthly payments required for the mortgage. Additionally, income property owners must also save funds each month to cover any repair and maintenance costs they are liable for on the building. Managing these cash flow balances and ensuring that the funds exceed the mortgage cost of borrowing and expenses on the property will help to increase the return on investment overall.
Rather than holding a real estate property over a long period of time, many real estate investors will also choose to deploy a property flipping strategy as a means for generating income from a property. Several resources for fix and flip investors are also available in the real estate market. One such resource is a fix and flip loan. These types of loans have become more popular with online debt crowdfunding platforms willing to take on some of the higher risks of fix and flip investments. Generally, these loans will be offered for shorter time periods with higher rates of interest than conventional loans. With a fix and flip loan, the income property is used as collateral, and the owner must be prepared to buy and renovate a property to resell it in a short timeframe. With a fix and flip property, the income property owner believes that the property resale value after renovations will cover the cost of interest on the loan and renovation expenses, generating an immediate positive return when sold. This type of income property investing includes higher risks than conventional income property ownership; however, it provides for a lump sum payout at the time of resale rather than over a prolonged period of time.