Investment Property
An investment property is purchased to generate income or appreciate. Understand financing, tax benefits, and management considerations for rentals.
Definition
An investment property is real estate purchased primarily to generate income, profit from appreciation, or both, rather than to serve as the owner’s primary residence. Examples include rental homes, multi‑family buildings, vacation rentals, and commercial properties. Financing investment properties may require larger down payments and higher interest rates than primary residences, and investors must account for operating expenses, maintenance, taxes, and vacancy risks. Tax benefits may include depreciation deductions, expense write‑offs, and 1031 exchanges for deferring capital gains. Successful investing requires careful market analysis, tenant screening, and property management.
Why It Matters
The financing alone changes the math: expect 20% to 25% down, a rate roughly half a point above owner-occupied, and six months of reserves verified in statements. Washington law then sets the pace at which you can raise rent and act on nonpayment, so the pro forma in a listing packet is a wish rather than a plan. Depreciation shelters real income while you hold, and recapture comes due when you sell.
Examples
A $700,000 Tacoma triplex needs $175,000 down at 25% plus about $23,000 in reserves the lender wants to see after closing.
An owner writes off $16,500 of depreciation annually against a $520,000 building allocation, then faces 25% recapture on the accumulated total nine years later at sale.
A tenant stops paying in month three, and between statutory notice periods and court scheduling the unit generates no income for four months.
Tips
Underwrite with a 7% to 8% combined vacancy and maintenance reserve even when the building is fully leased today. A deal that only works at 100% occupancy is not a deal.
Demand actual lease copies and the deposit ledger, not a summary spreadsheet. You inherit the leases, the deposits, and whatever rent history limits your next increase.
Decide before closing whether you are self-managing. Professional management runs 8% to 10% of collected rent, and a pro forma built without it overstates your return by exactly that much.
Related Terms
Gross Rent Multiplier (GRM)
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Multi-Family Housing
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Capital Gain and Taxation
Capital gains are profits from selling real estate. Learn how long-term and short-term gains are tax...
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