Investment Property
Real estate purchased to generate rental income or capital appreciation rather than to serve as the buyer's primary residence.
What is Investment Property?
An investment property is real estate acquired with the primary intent of earning a financial return, either through rental income (current yield) or capital appreciation (future gain upon sale), or both. Investment properties include single-family rentals, small multifamily properties (2–4 units), large apartment complexes, commercial real estate (office, retail, industrial), and short-term vacation rentals. From a financing perspective, investment properties face stricter lending requirements than primary residences: lenders typically require 15%–25% down payments, higher credit scores, and reserve funds covering 6–12 months of mortgage payments. Interest rates on investment property loans are generally 0.5%–1.0% higher than owner-occupied rates. Investors evaluate rental properties using metrics such as net operating income (NOI), capitalization rate (cap rate), cash-on-cash return, and gross rent multiplier. Tax rules differ significantly: rental income is taxable, but investors can deduct mortgage interest, property taxes, depreciation, and maintenance expenses—often generating a paper tax loss that offsets other income.
Example
An investor purchases a single-family rental home for $250,000, putting 25% down ($62,500) and financing $187,500 at 7.25%. Monthly rent is $1,900. After mortgage ($1,280), taxes ($220), insurance ($100), and a 10% vacancy/maintenance reserve ($190), monthly net cash flow is approximately $110. The cap rate is approximately 5.5% based on annual NOI of $13,680 divided by the purchase price. Over a 7-year hold with 4% annual appreciation, the investor projects total returns including principal paydown and appreciation to exceed 12% annualized.
Source: National Association of Realtors — Investment Property Research