What is income property?
Income property is property that the owner rents to others. Rather than occupying the property, the owner uses the property to produce income.
Both commercial and residential properties can become income property. Some income properties begin as owner-occupied homes. When the owner moves, rather than selling the home, he or she keeps it as an income property. If the home is paid off, the monthly rent becomes rental income for the owner.
Other income properties are second homes that the owner wants to use as a vacation or retirement spot. The owner purchases the home and uses it as a rental property to make the monthly payments until he or she decides to live in the home.
Investors own a portion of income properties. These homes are bought and sold solely for the purpose of producing an income.
You can take out a mortgage to purchase income property. Loans for purchasing income property usually have higher interest rates than those for purchasing owner-occupied homes. This is due to the risk associated with having the home go unoccupied for periods of time and the possibility that the owner cannot rent the home to produce an income.
Some investors purchase homes at the low point of the area’s housing market. While they wait for the market to rebound, they rent the homes out to cover the monthly carrying costs. Once the house appreciates in value, the investor sells it.
Income property example
If you want to add real estate to your investment portfolio, purchasing income property is one way to do so. For example, assume you eventually want to retire to a coastal property. The prices in your desired area are affordable, prompting you to purchase the property now and use it as income property until your retirement. Should you change your mind about moving to the property in the future, you can continue to rent the home and sell it once prices increase.