Too often, we hear about the “investment” that it is to buy a home. Try to find a home with the help of a real estate agent, and you will immediately be told that your home purchase is an investment. However, residential real estate, bought with a mortgage, is rarely an actual investment. By the time you repay the loan with interest, and pay property taxes, and cover the expenses related to repair and maintenance, you’re lucky to break even when you sell a residential property.

The reality is that your residential property shouldn’t really be viewed as a financial investment. You need to buy an income property if you are thinking of real estate as an investment.

What is an Income Property?

A residential property is one that you buy to live in. It’s your home. While you might feel good about “owning” the property, it’s not really making any money for you right now. You hope that it appreciates in the future, but chances are that the appreciation isn’t going to be enough to outweigh the costs. Your residence is more about having a place to live, and making a sentimental investment in your family and in your community than it is about actually seeing a capital gain.

On the other hand, an income property is different. This is real estate that you purchase with the intent to actively provide you with a stream of income. Rather than living in the property, you plan to make money off it right now, usually by renting it out. An income property can be a single family home, a multi-family apartment complex, or even commercial office space.

The idea behind an income property is that you are able to at least rent it out for enough that the mortgage is paid, and hopefully other costs, like insurance, taxes, and maintenance, are also covered. With the help of the rent paid by tenants, you don’t have to put out any of your own money. That way, any appreciation that the property sees is a true capital gain for you.

Even better is when you can generate enough that the income property provides you with a little extra on a regular basis. Whether you have to wait until the real estate is paid off in order to start earning money with your income property, or whether you can charge enough in rents to pay your costs and have some left over, the goal of an income property is to provide you with revenue. Eventually, you can sell for a capital gain as well.

The allure of an income property is that it’s possible for you to earn money almost passively. Your real estate generates revenue on your behalf. With income property, you have the chance to create regular revenue. Your residential purchase does not offer you that chance. Instead, you most often end up lucky to break even over time. As you buy real estate, keep your goals in mind. If you are shopping for a home, don’t think of it as a financial investment; if you want a financial investment, you need to buy income property.

Tom Drake

Tom Drake

Tom Drake writes for Financial Highway and MapleMoney. Whenever he’s not working on his online endeavors, he’s either doing his “real job” as a financial analyst or spending time with his two boys.