Understanding Investment Properties

Investment properties are those that are not used as a primary residence. They generate some form of income-dividends, interest, rents, or even royalties-that fall outside the scope of the property owner's regular line of business. And the way in which an investment property is used has a significant impact on its value.

Investors sometimes conduct studies to determine the best, and most profitable, use of a property. This is often referred to as the property's highest and best use. For example, if an investment property is zoned for both commercial and residential use, the investor weighs the pros and cons of both until he ascertains which has the highest potential rate of return. He then utilizes the property in that manner.

An investment property is often referred to as a second home. But the two don't necessarily mean the same thing. For instance, a family may purchase a cottage or other vacation property to use themselves, or someone with a primary home in the city may purchase a second property in the country as a retreat for weekends. In these cases, the second property is for personal use-not as an income property.

Residential: Rental homes are a popular way for investors to supplement their income. An investor who purchases a residential property and rents it out to tenants can collect monthly rents. These can be single-family homes, condominiums, apartments, townhomes, or other types of residential structures.

Commercial: Income-generating properties don't always have to be residential. Some investors-especially corporations-purchase commercial properties that are used specifically for business purposes. Maintenance and improvements to these properties can be higher, but these costs can be offset by bigger returns. That's because these leases for these properties often command higher rents. These buildings may be commercially-owned apartment buildings or retail store locations.

Mixed-Use: A mixed-use property can be used simultaneously for both commercial and residential purposes. For instance, a building may have a retail storefront on the main floor such as a convenience store, bar, or restaurant, while the upper portion of the structure houses residential units.