What Counts as an “Investment Property?” …And Other Terms to Know

By Elsie Dudukovich0 Comments

If you decided to be a home owner, there is a good chance other people spoke of your house as an asset.  Purchasing a house as a primary residence is an investment in your future; but in the same vein as pursuing higher or continuing education, concentrating on career development, maintaining a serious commitment to health and fitness, or adhering to well developed long-term financial plan. 

The term “investment” is used interchangeably to describe just about anything that will provide value in the future, however there are key differences in what is actually an investment.  These differences become especially important when you factor in the IRS rules surrounding what your IRA is allowed to hold.   

When it comes to purchasing real property, an investment property can be residential rental property, commercial property, or any property purchased with the intention of reselling at a profit (rehabbing).  In simple terms, an investment property is:
  • not your primary residence
  • purchased with the intention of being used for a financial gain; generating income, appreciation produces profit, or provides a method of taking advantage of a tax benefit
With this in mind, you need to set aside the emotions and outlook you used when you purchased the property destined to be called home and see this as a business transaction. The DailyFinance.com article “6 Acronyms Every Beginner Real Estate Investor Should Know” is a good start on getting comfortable with the lingo in the real estate investment world.  Author Ken Horst describes financial terms such as:
  • GOI (Gross Operating Income, which is the annual rental income collected from the property)
  • NOI (Net Operating Income, the amount of income that comes from subtracting operating expenses from received rental income)
He also presents an important topic: the CCR (Conditions, Covenants and Restrictions).  This document is the takes promises of what you and your tenants agree to perform, or not perform, as well as certain actions and puts it into written contracts.

When you’re investing in real estate with a self-directed IRA, there are additional acronyms that come into play in relation to keeping your IRA in good standing. Some of them include:
  • AGI (Adjusted Gross Income) - This is all the money you received (gross income), adjusting for items such as: alimony, deductible retirement plan contributions, and other possible deductions
  • MAGI (Modified Adjusted Gross Income) - This is your Adjusted Gross Income (AGI) that has been modified by adding back in some income or tax breaks.  This is used by some tax payers to determine their contribution limit for their retirement plan.  Some of the items added back to their gross income include foreign income not counted in the AGI, a deduction for student loan interest, or traditional IRA contributions
  • RMD (Required Minimum Distribution) - Unlike Roth IRAs, traditional IRA rules indicate the account holder must take distributions from the account by April 1st of the year after the account holder turns 701/2.  This amount is calculated based on your age and life expectancy, but the IRS provides simplified tables to help determine this amount as well as most IRA custodians providing a notice if the RMD applies to you.
As you can see, there are a number of differences when it comes to choosing a property for investment purposes and articles such as this are a good starting point on what questions to start asking.