Income Property vs. Residential Property

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.

Written by Tom Drake

Tom Drake writes for Stupid Cents and Canadian Finance Blog. 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 wife and two boys.

5 Responses to Income Property vs. Residential Property

  1. A home is one that you buy to reside in. It’s your house. an earnings residence is different. This is property that you buy with the purpose to definitely offer you with a flow of earnings. Thanks.

  2. Whichever way you look at property investment must be seen as a long term investment. Many people go into property hoping to buy and flip. In a short term you may not make much money. But if the rent is paying all the other expenses you can sit on a buy to let property until it doubles in value. You should really rely on income coming from it at the beginning. But as the property values go up the rent will as well.

  3. You would have to be secure financial wise to even think about the term Income Property. Most people just buy property (residential) then when somehow feels they can move on and sell mostly at a loss but still would be happy to get something out of it

  4. A principal residence is rarely an investment, One exception I found was with a friend who purchased a property next to a highway with an existing billboard, the sign pays about half his mortgage, not too bad! Of course he has to deal with the highway noise too though. Once the house is paid off that’s several thousand a year in passive income.

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