by PN Schiavone

Created on: February 22, 2009

Have you ever talked to a mortgage broker about a home loan? Quite often mortgage brokers talk about the property that will back the loan up at an investment. This makes perfect sense because after 30 years of paying this liability the home and any appreciation will be yours. Is this what an investment property really is? The answer to this question is no. Then why is every one talking about the investment in their home. What does it really mean to have an investment property? It is important that we understand what an investment really is and what a liability backed by an asset is. We will focus on this topic and give you a better understanding of an investment propety.

An investment will give the investor a return without any input from the investor. This means that the investor is not paying the loan off directly. If the investor takes a long vacation, gets sick, or just ignores it in the short term the asset still derives the investor money. This is why you cannot live in a house that you pay a mortgage on and call it an investment. If you get sick and cannot pay your mortgage then the bank will foreclose and take the house from you. In contrast if you are renting the property and you loose you job the renter will still pay the rent to you and you in turn can pay off the mortgage. This is the definition of an investment property. In the short term the renter will pay off the obligation of the loan with or without the investors input.

In the long term it is still possible for the investor to loose the property because of financial problems, but the investor is at least insulated to some degree from his personal ability to pay the liability of the asset. This is a risk that all investors take. Small investors with 1 to 4 properties take on more risk than larger investors with more properties. The more properties that an investor has the more others will pay his liabilities for the asset. An investor with 12 properties can endure missing two paid rents easier than an investor that only has 4 rental units. In the above scenario an investor with twelve units still is collecting 83 percent of the rent while the other smaller investor is only collecting 50 percent of the rent. Although the larger investor may not make any money in that month he certainly has enough money to pay off the mortgages and other liabilities of the property. The smaller investor may not be able to last as that long.

The definition of investment property is quite easy in the end. It is a property that is self sustaining for the investor in the short run and leaves the investor lower risk in the long run. If an investor has enough properties without mortgages then he truly has investment properties that will create wealth for him with little to no risk of losses in the future.

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