Investment property come in a variety types, shapes, and sizes. Which and what works best all boils down to the basic methods of making money in real estate.
There are generally 3 ways real estate makes money.
- Cash-flow: steady incomes from rents of residential or commercial space, or even from carrying the note on an owner-finance transaction.
- Equity Capture: This occurs when you purchase a property below its actual value. This is what is usually most associated with house-flipping.
- Market Appreciation: In the long term, home price generally go up in value over time (except when they have been artificially inflated by a real estate bubble!). People usually hang on to properties because they expect its value to increase over time. Another type of appreciation is Forced Appreciation: this basically means developing the property. A plot of land may not initially be worth much, but if you change that plot of land into a shopping center, it will be worth much more. Whether you make money on the deal or not, will depend on the business acumen of yourself and your real estate professional.
There are other financial benefits to owning real estate (like tax depreciation deductions, principal pay downs, and 1031 exchanges), but people generally buy investment real estate for the above four reasons. Investors generally evaluate properties on the potential in these attributes. An experienced real estate professional will know of these principles, and paired with his knowledge of the markets, he or she will be able to locate good investment opportunities for you.