Investment Property: How to Invest in Your Own Home

At Cottage, we recognize that purchasing or building a new home is a valuable investment in the future of you and your family. A home can be a stepping stone towards building a secure and enriching financial future.

That’s why we have prepared this guide for you to understand the ins-and-outs of turning your home property into a lucrative investment.

What Is an Investment Property?

A real estate investment property is any real estate property purchased with the intention to generate an income or return on investment via rental spaces, appreciation, or other commercial means.

This can be anything as common as buying and renovating a property to flip it and sell at an appreciated value, or building an ADU to rent out to an individual or business. Whatever the means may be, even your own home can serve as an investment property to bolster your income, finance your property, and build a healthy financial future.

Types of Investment Properties

There are various types of investment properties, each with their own methods of generating income according to the land and structure available. To kick off this guide, we’re going to explore some key types of investment properties:

1. Commercial Real Estate
2. Residential Real Estate
3. Raw Land

Commercial Real Estate

Commercial real estate is property that is meant to generate an income by commercial means, or by acting as a business-related workspace, rather than a home living space.

A commercial real estate property might be a small storefront underneath some apartments, or it could be a large shopping center, warehouse, boutique, restaurant, or any other variety of business. As long as it stands to earn income not only for the owner, but for the tenant as well, it can be called commercial real estate.

Residential Real Estate

Residential real estate, as the name suggests, is any property which serves as a living space for individuals or families, rather than serving a commercial or industrial purpose. These spaces are typically leased to persons or families without generating dollars outside of rental income or appreciation.

In short, any living space can be classified as residential real estate.

Raw Land

Raw land real estate is vacant, unused property with unrealized potential. It doesn’t have any utilities, structures, parking lots, or similar roadways. As the name implies, it is untapped, unutilized land.

How Can You Invest In Your Own Home?

With that being said, you don’t need to be a commercial real estate investor or professional land developer to make a return on your investment and generate some income from the property you own. Even your primary residence can serve as a valuable asset with healthy growth potential.

Improvements and Renovations

You can invest in your own home by undertaking a range of home improvement or house flipping projects and renovations in order to earn appreciation on your property’s value. This can even set you up to generate income in some cases.

• Investing in your own home doesn’t necessarily mean breaking the bank, either. Small home improvement projects like landscaping, powerwashing, repainting or installing new siding can help to boost the curb appeal of your property, and keep its value growing.
• Another way you can help your home appreciate in value is to renovate your bathrooms or kitchen by regrouting tile, adding kitchen islands, or installing new sinks and vanities. All of these tasks help to make a home look modern and fresh.
• Adding in an outdoor space like a patio, deck, or pool can also serve to boost value in many locations; however, with larger-scale outdoor projects like these, it's always worth it to research how they will affect your property taxes or overall property value. Spending large amounts on splashy projects do not always translate equivalently to value added to your home. Any large renovations like these are also likely to need approval from your Home-Owner’s Association (HOA)
• Expand your living space, or use existing rooms as attached accessory dwelling units (ADUs) to rent out for income. If you’d prefer to keep your living space private, you can also build a cottage or tiny house on your property to serve as a detached ADU. Generating income from tenants through monthly rent is a great way to finance future improvements and renovations.

Tips for Picking the Right Investment Property

Without the right research, it can often seem intimidating trying to find a property that will work as the right investment for you. Keep these tips in mind as you search for the right asset.

• Carefully Monitor the Market
• Hold a Long-Term View
• Learn the Relevant Metrics

Carefully Monitor the Market

The housing market has always been known to fluctuate, sometimes to historical proportions.

It’s important to carefully monitor the market as you look for homes or properties to purchase. Do some research on market trends and take the time to observe the market’s movement. Before you even make a move or consider anything, it's important to first gain a sense for how and why the market moves.

Hold a Long-Term View

The key to any good investment is to hold a long-term view backed by a knowledge of past market trends. Know that the housing market can often behave in a cyclical fashion, so try and figure out where you think the current market is positioned in that cycle.

When you look at properties for long-term investment, consider future commercial and residential development projects that might occur in the neighborhood to boost or detract value. Equally as important, consider environmental factors that may increase or decrease demand for that property.

Learn the Relevant Metrics

There are a good few metrics to keep in mind as you look toward investing in your own home or property:

• ROI, which stands for Return on Investment, is a term used to describe the profitability of an investment. Your return on investment is simply how much profit you make off an asset on top of your initial investment.
• Cash flow is a metric used to measure the profitability of commercial spaces. Cash earned is an inflow, while cash spent is an outflow. A business’ value is directly related to its ability to create a positive cash inflow.
• Cash on cash return applies the cash flow ideology to investment. A cash on cash return can be calculated by taking the total cash inflow of a property, and dividing it by the amount invested in said property.
• A capitalization rate, also called a cap rate, is a metric that is typically expressed as a percentage. It is used to measure the profitability of commercial real estate by taking the net income of that property, and dividing it by its total asset value. This is a great way to gauge ROI as well.

Things To Consider Before Buying an Investment Property

Property Taxes

Property taxes can be often overlooked, but serve as major expenses in any investment you make, and should be factored into your return on investment. Even once you fully own a property, you never stop paying taxes on it, so carefully consider the tax rates associated with any investment you make.

Certain home additions like decks, pools, and the like, can lead to higher property taxes. Always be sure to look into your township or city’s policies before beginning major construction projects on your property.

Should You Buy Alone?

When you consider expenses like property taxes, a mortgage, renovation costs, and so on, it can be a lot for one person to manage or support financially. Consider buying with someone who you trust, to lessen the strain on your own finances, while boosting the efficiency of your value-raising efforts.

Buying With a Partner

Find a business partner you can trust, who has strengths and expertise in fields where you may personally be more spread thin. This may be someone who can manage a property, or work on renovations. A business partner should not only be someone close to you, but someone who can operate efficiently with you in an organized, group effort.

Buying with a partner can help you save time and money, as well as secure important financial support, and a healthy safety net should you need it.

Engaging a Property Management Company

Similarly, engaging a property management company can provide you with a wealth of support. A property management company can attend to and maintain your property, and organize efforts to collect rent, account for finances, and develop the property.

How To Purchase Your First Investment Property

It’s time to purchase your first property! But first, stop yourself to consider these important points:

1. Figure Out Financing
2. Get Familiar With Rental Property Returns
3. Find the Right Property
4. Monitor Income and Expenses

Figure Out Financing

Financing is the first and foremost concern when it comes to investing in your own property. Figure out a way to finance your investment in a healthy, affordable fashion.

Don’t break the bank if you can find financial support to make the investment safer. This could be by securing a loan such as a mortgage loan, or else taking a private loan – just be prepared to make a down payment and disclose your credit score.

If you aren’t familiar with the mortgage industry, you can always ask your real estate agent for advice on reputable mortgage lenders with affordable mortgage rates. Many lenders have investment property loan programs with special interest rates specifically designed for borrowers looking to invest. If you do end up with a higher interest rate than you would like, you can always refinance your loan when interest rates fall.

Look into grants, tax deductions, and tax returns or other tax benefits that your city or state might offer for certain types of properties or property owners. Or, try looking for a business partner to carry some of the load and help organize affairs.

Get Familiar With Rental Property Returns

Using the metrics we discussed, get familiar with how rental properties generate a return on investment. This means calculating not only the value of your investment itself, but the cash inflow of the property, its rate of appreciation (or depreciation), maintenance costs, and property taxes. All of these expenses and earnings should be factored into a comprehensive budgeting plan.

Find the Right Property

Whether it’s your first home, your second home, or even a vacation home, the right property has to have developmental potential. Look for a property that is likely to see an increase in demand or value. Get to know the neighborhood where your property is, as well as the township or city.

The financial welfare of your neighbors, local businesses, and the area at large can all reveal to you the potential of your property. For instance, if businesses are developing healthily, and your neighborhood is growing residentially, or if investors are looking at other properties in the area, these factors may point toward a positive return on investment.

Monitor Income and Expenses

Keep close track of your cash flow. Monitor all expenses going in and out of your property investment. The best way to secure a safe financial future for your investment is to take careful consideration, and to organize accordingly.

Conclusion

With the points we’ve gone over in this guide, we hope you feel a little bit better prepared to take on your property investment. We promise you that investing in your home can be a fulfilling, profitable experience, rather than a stressful or intense one.

Cottage is here to guide you along the way! Want to generate income for your property by building an ADU, or need ideas for renovations to make your value sparkle? We’ve got you covered with a comprehensive program for constructing or renovating your own ADUs. Schedule a consultation today!

Sources:

What Is Commercial Real Estate? | Investopedia

Top 8 Renovations to Increase Home Value in 2022: Offices and Outdoors Rank High | HomeLight

What Is a Good Cap Rate & How to Calculate It | Fortune Builders