Differentiating Residential Investment Property From Other Types of Properties

Posted on: May 1, 2012

Categories: Commercial Building, Residential House

Author: lbuen

Residential Investment Property & First Time Investment Property Investors

A residential investment property is often the type of property that every neophyte real estate investor first invests in. This is because purchasing this type of real estate is simpler and closely resembles buying your personal home, except for some differences, such as typically higher loan rates for investment properties as compared to the cheaper mortgage rates for personal homes.

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Photo Courtesy of kathleenleavitt via Flickr

What is Residential Investment Property?

Residential investment properties are single family homes that are bought to be rented out for rental income and eventually for capital gains. Other investors also consider duplexes and four-plexes to be under this category because the method of how to estimate the value of such properties are similar to that of residential investment properties.

So how are residential investment properties appraised?

Most single family homes are bought to be used as a place of residence for the owner while a very small percentage of these are bought for rental. Because of this relatively small number, the value of a residential investment property is assessed also using the methods, called comparable sale methods, primarily used for assessing the value of a personal home. In these techniques, the residential investment property in question is compared to other properties within the area which have more or less similar features, such as number of bedrooms, floor and land areas, number of bathrooms, and other amenities. Cost per square foot and cost of constructions are also factored in when comparing and assessing the properties. The value of duplexes and four-plexes are also assessed using the same methods, that’s why these properties are also considered to be under this category.

To illustrate, let’s say you want to buy a 2-bedroom, 1-bath residential investment property. You want to know its market value so you compare it with another property in the neighborhood that is of similar style and size. This property was sold less than a month ago for $100,000. This means that the market value of the residential property you wish to acquire is also more or less worth $100,000. Realtors usually compare and get the average of about three or more of these similar properties within the area to determine the value of a property. Then they just make the necessary adjustments for certain differences.

How Does a Residential Property Differ From a Commercial Property

Commercial properties are real estate that generate income. These include apartment complexes of at least 12 units, retail, office, and industrial buildings. Just like residential investment properties, the owners of these properties do not live there but they rent them out to tenants for rental income.

You may ask, why is your single-family or duplex residential investment property not considered a commercial property when it also does generate monthly income? Your residential investment property does not fall under this category because the method of valuation used to assess the property. Since it is very similar to residential homes, your residential investment property is assessed using the comparables methods, the same techniques used to appraise residential homes. The value of commercial properties, on the other hand, is determined by how much income it produces, that is, income less operating expenses. So the price of the commercial real estate is worked out by the amount that the investor is willing to pay for its projected net operating income.

As you gain more name and capital, you get less intimidated by the value of commercial properties so you can grow your investment portfolio, which started with your very first residential investment property, by adding huge apartment complexes and shopping strips.

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