Invest in Real Estate

Investment Property Loans

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Popular Questions

FAQs

What is an Investment Property?

An investment property is purchased to generate income – and is not your primary residence. Qualifying for a mortgage to purchase an investment property can be more difficult due to the more stringent lending guidelines.

Why should you invest in real estate?

Investing in real estate is a great way to increase your monthly income by renting the property to tenants. Purchasing an investment property also allows you to diversify your investment portfolio, which can protect you during economic downturns.

Benefits of Investing in Real Estate
  • Generate income through renting
  • Tax breaks & deductions associated with owning an investment property
  • Hedge against inflation with rising property values
  • Build equity & increase wealth
How to Calculate ROI from an Investment Property

One way to determine how profitable an investment property will be is to calculate the “return on investment” (ROI). There are a few ways to calculate ROI – we will do so by dividing net operating income by the mortgage value.

ROI = (Annual Rental Income – Annual Operating Costs) / Mortgage Value

For example, let’s say you rent out your property for $2,000/month ($24,000 per year). For our example, we’ll say that your operating costs for things like insurance, property taxes, maintenance, etc are $1,000/month ($12,000 per year) and your current mortgage is $400,000. Using our formula, we can then calculate that your ROI is 3%.

($24,000 – $12,000) / $400,000 = 0.03 = 3%

Pros

Income Potential
While it may take some time to reap the benefits of purchasing an investment property, those with the patience to see positive returns have the potential to generate substantial cash flow. Income potential is often the main reason many choose to invest in real estate.

Appreciation
Real estate can be an excellent long-term investment plan. Those who hold onto rental properties over a long period of time can benefit from appreciation and eventually sell the property for a large profit, all while earning monthly income.

Tax Breaks
Purchasing an investment property comes with tax benefits. You can deduct many expenses associated with owning an investment property, including mortgage interest, property taxes, insurance, and the cost of ongoing maintenance/repairs.

 

Cons

Initial Capital Required
You’ll need a significant chunk of cash to get an investment property up and running. Minimum down payment requirements start at 15% for investment properties, and you’ll need to show additional months of “reserve” funds on hand to cover the mortgage in case of a financial emergency. Once you’ve purchased the home, repairs or renovations may be necessary to make the home attractive to potential tenants.

Time
Managing an investment property can be very time-consuming. You will need to find responsible tenants, make sure rent is paid on time, and perform maintenance or repairs if needed. You could hire a property manager to take care of these for you, but this will cost you between 8-12% of your monthly rental income, on average.

Liquidity
Because real estate is not a liquid asset, you’ll need to sell the property if you’re in need of cash. It can take several months to list a property and complete the sale, so you won’t have immediate access to your money.