Property investment, such as house flipping, is a hot topic right now among investors and especially on TV. Purchasing property with the intent of earning a return on the investment from the future resale or rental income has many pros and cons.
5 reason to consider investing in property
Buying property is one of the largest purchases someone can make. Choosing to invest in property, whether for a primary home, rental property, or home to renovate and flip, may be excellent for a variety of reasons.
- Property is a tangible investment. Many people choose to invest in property because real estate is an example of a tangible investment. This means that it is an asset that can be touched or physically used, which may give the investor an additional sense of security.
- Fixing a house can be fun. Fixing up a house allows people to express their creativity and to feel a sense of accomplishment.
- Increased value is important. Real estate tends to appreciate, or go up, in value — especially if bought in highly sought-after areas.
- More income is always better. Investment property is a way to start a new stream or multiple streams of income and build wealth.
- Returns can be high. Property investors may see a return on investment, or ROI, in the form of continuous rental income or by selling the property for a profit.
What are the different types of investment properties?
There are many investment property options with some more popular than others depending on the location where you choose to invest. You should also consider thezoningthat the property lies within and what the most beneficial use of it would be.
Zoning refers to the laws that guide how property is allowed to be used in a given location. These laws are intended, in part, to limit certain kinds of businesses from building in residential areas.
Here are some examples of different types of investment properties and the locations where you may seek to find these types of properties.
- Suburban area: A house with a backyard
- Urban area: A condominium, townhouse, apartment, or duplex
- Coastal area: Beachfront property or home
- Mountains or rural area: Cabin, lake house, or other property used for vacation rental
- Industrial area: Manufacturing, industrial, or other business property
- Shopping area: Property in a commercial strip mall
What time commitment is right for me?
As a property investor, you need to decide whether you want to pursue this as a short- or long-term endeavor. The major difference between the two is short-term investment involves selling the property while long-term investment means holding onto it as you rent it out.
Here are a few additional tips to keep in mind about investing in short- and long-term investment property:
- Both come with a risk of sitting vacant, but the possible profit from selling may help you recover sooner from anycarrying cost. Carrying cost is the amount you spend on the property before it is rented or sold and includes costs such as mortgage, utilities, and maintenance.
- If renting, property may appreciate over time, which can build equity.
- A big portion of your investable income is tied to the property, if renting, and notliquid. Liquid refers to an asset that can easily be converted to cash.
- Success with both depends on the demand and timing of the market.
What costs are involved with property investment?
Many other costs are associated with owning investment property. Spending a little on some of these may help provide a larger return of profit.
Upfront costs:
- realtor fees
- costs of property improvement
- contractor fees
- renovation material costs
- utilities during the renovation phase
- closing costs or property management fees
Continuing costs:
- taxes
- landscaping
- pest control
- home insurance
- homeowner association dues
- unexpected costs
- property management fees
The costs and fees associated with property investment may feel daunting, but don’t forget —some of these costs may actually add valueto your property, which means a better investment for you.
How can I acquire property?
There are three main ways that an investment property can be acquired.
- Buy: You have a fund dedicated toward the purchase of an investment property.
- Finance: You take out a loan and pay a monthly mortgage.
- Transfer: You receive property as a gift or transfer from someone’s estate.
Am I in a financial position to invest in property?
One way to determine whether you are in a good position to acquire property as an investment is to calculate yourdebt-to-income ratio. Your debt-to-income ratio, or DTI, equals your monthly debt payments divided by your gross (pre-tax) monthly income, expressed as a percentage. Lenders use this number as one way to determine your ability to afford your debt payments.
Your DTI indicates the percentage of income you could have available if needed. There are differing views regarding healthy debt amounts that differentiate between good debt and bad debt, but as a property investor, you want a low debt-to-income ratio.
How will owning property affect my taxes?
The IRS has many tax regulations in place regarding investment property.
Pros: You may deduct the amount needed for maintenance, repairs, insurance, property tax, and depreciation on your tax return.
Cons: The IRS requires rental income and other amounts related to using the property to be categorized as income. A property that is sold for more than it was bought is considered a capital gain.
Pros: It may be possible to defer capital gains taxes and immediately roll over the profit from selling the property into another investment. A capital gains tax is a tax levied on profit from the sale of an investment property.
Cons: Capital gains on investment property may be taxed significantly depending on the net gain amount.
Pros: “Dual-use” deductions for items and services used for personal and rental activities, such as the use of your cell phone, mileage on your car, tolls, or even air travel to your investment property.
Key points
- Increase your income. Investing in property may bring in more lines of income and help build your wealth.
- It’s a big commitment. Investing in property can be enjoyable, but it is a large financial and time commitment.
- There’s lots to consider. There are many options to consider including the location, property type, and how long to own it.
- Factor in interest and taxes. Interest rates on loans and income tax rates will both be major factors to consider before investing in property.
- Determine the ROI. The return on investment (ROI) needs to work in your favor by providing a profit.
Next steps
- Do your budget. Create a financial plan as you prepare to invest in property.
- Find the right property. Decide on the type of property, location, and time commitment that works for you.
- Do your homework. Start researching the area you are interested in while paying special attention to the local real estate market.
The information in this article was obtained from various sources not associated with Adirondack Bank. While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. Adirondack Bank is not responsible for, and does not endorse or approve, either implicitly or explicitly, the information provided or the content of any third-party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. Adirondack Bank makes no guarantees of results from use of this information.
Article written by EVERFI
