Many people believe that investment properties are just for the wealthiest homeowners. They are an aspirational investment plan for wealthy landlords who oversee a fief of rental homes that enable them to live comfortably on passive income.

Of course, the reality is more practical and attainable; it typically doesn't involve a rapid route to wealth but rather calls for planning, diligence, a ton of research, and even more luck. We've spoken with professionals about this sometimes challenging but ultimately lucrative area of real estate investing.

We had conversations with the hosts of the Design Network show Flip U, Brad Rempel, and Jennifer Wayne; Brian Shahwan, vice president and mortgage banker at William Raveis Mortgage; Thomas McCormack, senior partner and broker at Resources Real Estate; and Jennifer White, an associate at RE/MAX.

An investment property: what is it?

What exactly is an investment property, first of all? In essence, it refers to any real estate that you purchase to realize a return on investment, whether that be through rental income or a profit at the time of sales following an increase in the value of the property.

Thus, it's a really broad category of real estate, and it may even include a home that you purchase to relocate there.

However, in real life, people usually distinguish between a home and an investment property, with the latter usually denoting a property you purchase that isn't your permanent residence or a vacation spot.

People often distinguish between house flipping and investment properties, with the former referring to an almost immediate resale and the latter to a property with a longer-term real estate investment strategy that involves rentals or that sits out the real estate market for years to reap larger resale profits. Technically, an investment property could also include a home you buy and then put on the market right away.

What types of investment properties are there?

An investment property can be any type of real estate. This covers all types of real estate, including residential, commercial, and industrial spaces as well as undeveloped lots that stay undeveloped for the duration of your ownership. All that matters is if you can locate any kind of real estate that you believe would provide a healthy return on investment.

What benefits may investment properties offer?

Regardless of how well the other sources of your income are doing, the monthly rent from your rental property offers you a reliable passive income stream that can truly make a difference. (Of course, assuming your tenants are responsible.)

You stand to gain from the appreciation of your investment property after you decide to sell. Theoretically, you may gain a significant return on investment when you cash out—of course, depending on the real estate market you bought and sold in, the upgrades you've made to the home, the eagerness of the seller to close the deal, and, let's be honest, a whole lot of luck.

It's also a means of wealth diversification. Real estate is viewed by many experts as a less volatile investment than IPOs, cryptocurrencies, high-yield bonds, and equities. When it comes time for them to retire, some homeowners view their investment properties as safe havens that will yield a consistent stream of income.

What drawbacks are there to investing in properties?

Your monthly expenses will likely increase if you are unable to pay off an investment property's entire purchase price with cash. This is because you will likely have to make mortgage payments for a period. Purchasing an investment property if it will make your monthly net worth unaffordable will probably drag you down eventually.

You are also responsible for all the costs that come with owning a home, including taxes, maintenance, repairs, utilities, HOA dues, and so on, until you sell the property. When you finally figure out how much of a return on investment you're getting, the cost of any renovations you must do to increase the property's worth or make it more appealing to rent or sell goes toward your expenses.

No matter how certain an investment is purported to be, there is always some risk involved. Even while real estate is thought to be more stable than many other investments, real estate carries some risk, and many investors have lost everything they invested in it, particularly in the event of a housing bubble crash. You can't count on your property's value increasing, even in real estate markets that are believed to be immune to market fluctuations, like New York City or San Francisco. Furthermore, if you paid too much, you might never recover your investment and might even have to accept a loss on the sale to get rid of the property and cease losing money on its ongoing costs.

Lastly, you'll need to become a landlord, which isn't always an easy task, if you want to use the property as a source of rental income. You'll need to invest time and money to ensure your renters are happy and that you continue to get their monthly rent because they will have rights and expectations. And what happens if you get terrible tenants by drawing the short straw? When you prepare for the worst-case scenario—eviction proceedings—add legal fees to your expenses column and work to rapidly put your investment property back on the market to locate more appropriate tenants and resume collecting rent each month.

What’s the 1% rule or 2% rule for investment properties?

According to the 1% rule, the monthly income from your investment property must equal at least 1% of your total investment. According to the 1% rule, you should make sure you could earn $10,000 in rent each month (1% of $1 million) before purchasing a $900,000 home that would require $100,000 worth of renovations and repairs.

For more profitable (and pricey) marketplaces, such as certain areas of New York City or San Francisco, the 2% rule applies. Therefore, you would want to be able to demand at least $20,000 in rental income per month for the same hypothetical residence.

There are further broad guidelines as well. For instance, a 10% yearly return is typical, therefore according to McCormack, "if I spent $300,000, I would like to net $2,500 a month after all expenses are paid."

"A respectable return is generally thought to be in the range of 8 to 12%, although this range is broad as it depends on the borrower and their specific goals," explains Shahwan. "This number can fluctuate due to various factors."

Keep in mind that none of them are precise mathematical formulas or unbreakable principles of real estate investing; rather, they are merely general guidelines. The particulars of your life and financial status should be taken into consideration when determining whether to purchase an investment property. In the end, you are the one who will choose the return on investment you are looking for.

Where should I look for investment opportunities?

Both the real estate market and your options for investment houses can fluctuate greatly. It's also unlikely that what you're searching for in an investment property would match that of another person because no two property owners are alike.

Examine the real estate markets in the communities you are considering. Speak with and think about hiring an agent who is familiar with the area market. Investigate and look for any trends: Are a large number of individuals migrating into or out of the area? Have rent costs been steadily increasing, staying the same, or falling sharply? Has Amazon established a new regional headquarters in the area, attracting financial investment and additional housing-related families?

Most importantly, are you purchasing a home where people can genuinely envision themselves residing?

The location is the most important factor to consider when purchasing investment real estate, according to Wayne, regardless of whether it is your first or second home. "I've discovered that many customers prefer a property in a great location over a large home that is farther away if you plan on turning your investment property into a rental home. I have a few smaller rentals in Florida that are in a gorgeous location (just a block from the beach!).

"I have experienced significant returns on investment by giving priority to a view," Rempel states, adding that both of mine overlooks a pond.

What qualities need to an investment property have?

Finding an investment property isn't often all that different from purchasing a primary residence. Which would you prefer—a multifamily house in the city or a single-family home in the suburbs? Is the neighborhood regarded as secure? How is the transit system? Are the educational institutions good? All of these factors will influence the amount that individuals are willing to pay for rent or at resale.

"When searching for a good investment property, return on investment should be the top priority," advises Shahwan. It's crucial to consider both the property and its surroundings. Although riskier, finding real estate in developing districts can be quite advantageous.

Compared to residential residences, commercial real estate can be a very other animal. A commercial real estate investment has the potential to yield much higher returns, but you must be prepared for the drawbacks as well. These include generally higher purchase prices, stricter management requirements, a greater need for outside assistance from contractors, and increased risk (such as when someone is involved in an automobile accident on the ice in the parking lot).

"Returns and what to look for vary drastically between residential and commercial properties," adds White. While some homes are bigger cash cows, they won't appreciate as much as others that might bring in less money upfront but offer far larger returns in the long run. Having a thorough understanding of your market is essential.

No matter what kind of real estate you're looking to purchase, if no one wants to live or work there, it won't be a smart investment.

According to McCormack, "tenant demand is key." "If you have access to available contractors who can renovate swiftly so you are not off-market for an extended period of time, the condition is not necessarily a factor.”

As it essentially implies the property comes with passive revenue already built in—you won't have to waste weeks or months waiting to fill the space with paying tenants—buying a property that already has tenants may be an enticing alternative for you.

"Some investors prefer buying a property with tenants as long as the seller can demonstrate a consistent track record of tenant payments, even though vacant properties are occasionally of interest because it makes it easier to upgrade and do all the necessary work up front," McCormack adds. "Money is lost every month you are unoccupied."

Furthermore, don't obsess with size.

Most of the time, the property won't be the largest (both of my properties are currently about 1,200 square feet)," claims Rempel. "I've discovered that they are easier to maintain the smaller they are."

Which types of buildings are preferable to invest in: newer or older?

If you are absolutely confident in your ability to renovate and have extensive fix-it know-how, you might want to consider purchasing an older building that requires some TLC and fixing it yourself to maximize your profits. Just keep in mind that you may use your own time to pay for what you would be saving in money.

According to Shahwan, "Buyers who are comfortable performing upgrades and renovations themselves might want to buy older buildings so they can maximize their cost-benefit ratio and do the work themselves." Purchasers who are not as skilled in repairs and who want to start making money right away can choose newly built houses. This isn't a place where one size fits all. Buyers should act in their own best interests and financial best interests.

Purchasing an older property may seem appealing if you have the skills to renovate it yourself, but keep in mind that there will probably be costs associated with it as well as certain fixtures you won't be able to install yourself.

In an email, Rempel and White stated that "buyers can often get trapped in the illusion of buying an old home when browsing the market for an investment property." "Although buying an older home may seem appealing, it's important to consider the maintenance costs involved."

For HVAC systems, for instance, the $5,000 rule is advised to be adhered to: Multiply the equipment's estimated repair cost by its age. If that amount is less than $5,000, you ought to fix it. If the cost exceeds $5,000, it ought to be replaced.

If you're updating to be more energy efficient, changing systems in an older home can actually save you a lot of money over time.

What is the appropriate amount of personal funds that I should invest in properties?

Determine how much you can afford to put down before making the purchase. This is because, should you fail to find tenants who generate passive income right away, you will need to pay for the upkeep and expenses of the property until such time as well as the mortgage, making sure that you offer a sufficient down payment to avoid being subject to requirements such as mortgage insurance.

"For an investment property, if you are not paying with cash, you would need to put down at least 20 to 30 percent in addition to six to twelve months of carrying costs in case you don't rent it out right away or make a profit right away,” advises White.

Additionally, lenders could put their requirements on you.

According to Shahwan, "A lot of lenders require the borrower to have reserve funds in case any additional expenses arise." Reserve funds are money that remains in your account after it has closed. The duration of the reserve needs may range from six to thirty-six months.

What advantages does investing in real estate have in terms of taxes? How can I profit from an investment property? What is a 1031 exchange?

Complex real estate tax laws have the power to make or ruin an investment in real estate. For instance, if the conditions are appropriate, you may wish to take advantage of a 1031 exchange, which lets you postpone paying capital gains taxes when you switch investment properties.

According to Shahwan, "an investment property may have a number of tax benefits, such as capital gains taxes, mortgage interest deductions, property depreciation, 1031 exchanges, etc." "To find out exactly what applies to your unique situation, it's important to speak with your tax professional."

Additionally, keep an eye out for "mansion taxes," which are extra local taxes levied on homes with greater value. These taxes are typically imposed regardless of whether the property is the owner's primary residence or an investment property.

How does my return-on-investment properties change in response to rising interest rates?

Has your mortgage rate been set in stone? If not, interest rates should be closely monitored as they have the potential to turn a successful investment unprofitable.

According to Shahwan, "If you are not currently locked into a rate, this could mean that your overall monthly profit between rental income and expenses changes as rising interest rates will increase the overall monthly mortgage payment."

Before you see a respectable return on investment, how long should you anticipate? And what constitutes a good ROI?

Whether you purchased the property for monthly rent and ongoing passive income or intend to make the majority of your money through resale will determine when you begin to realize the desired return on investment. Some other things to consider are as follows. Tolerance for danger and patience may be the most important factors of all. Searching for an investment property can be tailored to your timeframe if you already know when you want to recoup your renovation and purchase money.

According to Rempel, "I look for a comparable piece of property and see what it goes for per month, and then I multiply the annual income by seven." "I do it because I want to be sure I can get my money back in seven years after I finish buying the house and remodeling it. Even though it's not always possible, if it is, I'll definitely think about purchasing it.

What kind of tenant should I have for my investment property? When is it that I want to be free of tenants? Do you think I should use Airbnb?

Ascertain that you are aware of all applicable laws and regulations regarding the rental of the property you have in mind. A significant sublessor fee might be added to your monthly maintenance if it's a cooperative apartment, for instance, and prospective tenants might need to be interviewed by the cooperative board.

While short-term rentals are undoubtedly an option, maintaining a home with a steady stream of short-term visitors can be labor-intensive, much like operating a B&B or small hotel. Your costs will go up if you have to pay a management company to assist with managing your Airbnb or short-term rental home. It's important to note that many towns have varied regulations concerning Airbnbs. Before making the purchase, make sure you are fully aware of the legislation in the area you are shopping in.

How much time will it take me to handle each investment property?

Property management firms are able to look after your investment properties; however, as they are not going to do it for free, they will inevitably lower the return on investment.

After you've owned the investment property for a while, you should anticipate spending some time and money on upgrades and renovations. However, the amount of time you spend on investment properties doesn't have to be significant—you don't even have to be in the same state or region as your investment properties.

According to Shahwan, "In an ideal world, investors shouldn't have to spend a lot of time dealing with problems, whether they are caused by the property itself or the tenants." "The amount of time that the investor may need to invest really depends on the overall picture."

What is a reasonable amount of properties for investment?

If it makes sense for you, many experts believe there is no upper limit to the quantity of investment properties you can add to your portfolio. It all depends on your situation and how fortunate you are to find tenants who don't require a lot of upkeep.

"Managing properties can be relatively easy if you have well-maintained properties and responsible tenants, which should allow you to take on more properties," McCormack adds. "I would rather have genuinely reliable tenants paying less than market rent than demand premium money from 'problem' tenants. Although I believe there can be wide variations in this, I know many investors who claim that 20 properties is the magic number for them.