Imagine earning an income without working. It might sound too good to be true, but it isn’t! If you carefully invest your savings, your investments will earn you money with time. In other words, you’ll earn a passive income—and one of the best ways to do it is by purchasing investment properties. But what are investment properties, and how can you build your long-term wealth by purchasing them?

Here’s a comprehensive look at building long-term wealth by purchasing investment properties.

What is an Investment Property?

The term “investment property” refers to real estate bought to be sold at a higher price in the future. In other words, investment properties are limited-term purchases buyers seek to offload for a profit. According to the International Financial Reporting Standards, an investment property also includes the land the building is on.

One of the most important distinctions between an investment property and other properties pertains to its occupants. Owners don’t occupy investment properties themselves. Instead, they either rent the property to a tenant or leave it unoccupied. Additionally, investment properties differ from commercial properties because they’re not used to produce goods or services exclusively. Therefore, retail outlets don’t count as investment properties—but as mixed-use buildings that contain a retail outlet beneath residential units. More on this later!

What Types of Investment Properties Are There?

The two most common types of investment properties are houses and apartments. Both are considered residential real estate because they’re built specifically to serve as a home.

Houses typically cost more than apartment units because they’re bigger and cover a larger land area. In contrast, apartment units represent one section inside a multistory building—although some buyers purchase entire apartment buildings to earn a higher ROI through rental payments.

Although commercial buildings aren’t classified as investment properties, the same can’t be said for mixed-use buildings. These are properties that have both residential and commercial elements. For instance, an apartment with a hair salon underneath counts as a mixed-use building because the owner is entitled to rental payments from both residential and commercial tenants.

Land that doesn’t have any buildings developed on it is also considered an investment property. In other words, if you’re purchasing plots of land, holding them, then reselling them at a higher price, you’re dealing with investment properties.

Three Ways of Building Your Long-term Wealth Through Investment Properties

Long-term Appreciation of a Single Property

One of the most common methods of building long-term wealth through investment properties is by waiting for them to appreciate. With this method, buyers purchase investment properties in the hopes that they’ll become more valuable in the future. Once the properties have appreciated, they’re sold for a profit.

Selling investment properties after they appreciate is a popular method of building long-term investment because it helps investors counter the effects of inflation. For instance, the median price of an existing home rose by 17% this year. However, the inflation rate in the United States is currently around 5%. In other words, if you bought an investment property last year, you would’ve made a 17% return on your investment while the price of goods and services only rose by 5%!

Rental payments

Imagine buying a property and then leasing it out to earn an income from your tenants’ rental payments. That’s exactly what countless investment property buyers do every year across the country! Real estate investors purchase homes, apartment units, and mixed-use buildings solely to earn an income through rent. Once rental payments have covered the initial cost of the property, the property begins to generate a profit.

Renting out investment properties is potentially more lucrative than simply holding property and waiting for it to appreciate. If you rent out your investment property, you’ll simultaneously earn an income from rental payments and appreciation. However, the downside of doing this is the maintenance involved.

According to property laws in states like Florida, landlords must bear all repair costs if they’re leasing out residential real estate to home renters. If your average maintenance costs exceed your earnings through rent, your investment property will yield a loss instead of a profit. It’s also worth noting that if you’re a landlord in Florida and you don’t perform adequate maintenance, your tenants can legally refuse to pay rent. This will further hamper your ability to build long-term wealth through your investment property!

Renovating & Flipping Real Estate

Real estate flipping refers to buying properties one after the other and selling them each time for a profit. For instance, suppose you have $300,000 saved to purchase and flip a house. If you buy a house for $250,000, spend an additional $50,000 to renovate it, and sell it for $350,000, you earn a $50,000 profit. If you repeat this process, you’ll keep earning profits and build your long-term wealth.

It’s important to note that flipping properties at an artificially inflated price without renovating them considerably is illegal. Therefore, if you’re thinking of building your wealth by flipping investment properties, you must ensure you carry out substantial renovations that justify your asking price.

Using Investment Property Loans to Finance Investment Properties

If you’re short of the funds required to purchase investment properties, it’s time to consider applying for investment property loans. These are mortgage loans property investors take out to finance investment properties.

Investment property loans—like all other mortgage loans—require the borrower to pay monthly premiums. If your earnings from the investment property exceed the premiums owed on your mortgage, you’ll end up with a net positive result. In simpler words, investment property loans will help you build your long-term wealth so long as you’ve accurately calculated your earnings!

If you’re ready to build your long-term wealth through investment properties but require financial assistance to get started, come see us at Atlantic Home Capital. We have several mortgage experts on our team that’ll be happy to walk you through the process of applying for investment property loans. We also provide non-conforming mortgage loans for clients with high credit scores and no W2 loans if you earn an income through freelancing.

Drop us a message today, and one of our seasoned mortgage consultants will reach out to you ASAP.