Tips For Buying an Investment Property
Given that the real estate industry is a highly profitable business, it is understandable why people are so interested in getting into the profession. Investing in a rental property, rather than just investing your money in stocks and bonds, can provide you with greater financial security. Rentals return more stable prices, whether that be on capital appreciation or rental income.
An investment portfolio also increases diversification as well as the tax benefits. Investing in real estate can be challenging. Even if you make the correct decision with your first home, it doesn’t mean your other properties will succeed. Before making any decisions, it’s essential to learn how to invest wisely. These tips will make buying a house as an investment property less daunting.
Decide Between Getting a Mortgage vs. Paying Cash
If you have the option of paying in cash for the property, weigh the pros and cons against financing it. Let’s check out the pros and cons for each:
Advantages of Paying Cash
- You’ll have the opportunity to negotiate a better deal with the seller.
- You’ll be able to avoid associated closing costs, fees from mortgages or home loans, as well as avoiding the interests that would accrue over time.
- You’ll have equity in the entirety of your home and will reap immediate cash flow from the property.
Disadvantages of Paying Cash
- You can’t deduct the rental expenses from your income, and you have to pay taxes on all earnings.
- Locking your money into one single investment can be risky and will limit the diversification of your investment portfolio.
Advantages of Financing
- Greater flexibility in your investment portfolio and the ability to spread cash across different investments.
- You are able to deduct mortgages for all investment properties and any associated fees, such as lender fees.
- As inflation goes up, the debt on your home or other property is devalued, and while your loan payments stay the same, you can raise rent to compensate.
Disadvantages of Financing
- If you depend on your tenants to pay off your mortgage, any vacant properties will cause a negative cash flow.
- You risk foreclosing your loan if you are unable to pay off your mortgage payments adequately.
Obtain a sizeable down payment
For investment properties, the bank often requires a 20% down payment. If you put in more than 20%, there are many benefits that accompany this more significant investment in the property. A mortgage loan with a lower interest rate, better chances of approval, and less money spent monthly will cost you much less than a privately insured mortgage.
Prepare for Lower Taxes
Knowing the basics of taxes is essential when you’re starting on an investment property. Income from your rental property is taxable, but it is not subject to the typical social security and medicare taxes. You can claim deductions for the fees associated with property management, land taxes, interest incurred on a home loan for your residence, insurance costs, and water rates. You can also deduct borrowing expenses such as broker fees, mortgage insurance, title search fees, and legal fees or expenses on your mortgage documentation.
A Landlords Legal Obligations
As the landlord, you will want to protect your investment and your tenants, so understanding your legal obligations is important. Your responsibilities will include all windows, doors, gutters and drains, gardens and patio, gates, and fences. Safety is an essential factor as well, from making sure it has adequate gas facilities and pest control to proving compliance with the government’s energy efficiency standards.
The landlord is responsible for maintaining a holding account with the DPS, and they cannot withhold your deposit without a valid reason. Landlords can’t deny someone an apartment based on their race, gender, sexual orientation, or religious beliefs. To avoid run-ins with the law when renting a place, be sure to read up on landlord-tenant rules.
Fixer-upper homes are properties that have gone through recent renovations and require additional work before they can become residential property. When considering a home purchase as an investment property, it is a good idea to buy and invest in a fixer-upper. Here are some tips:
- You should choose a property in a safe location, an up-and-coming neighborhood, and with well-maintained houses.
- The property should require few repairs and not major refurbishment.
- Buy property in a city where housing prices are likely to increase.
- Before completing the sale of your home, make sure to be sure that a professional home inspector has inspected it.
- Don’t buy a fixer-upper with a poor floor plan.
The trick of investing in low-priced homes is not just buying but fixing the problem quickly and knowing when enough money has been put into the house to make it worth your while.
Calculate Cost and Profit
Before you invest in a property, it is crucial to understand what the return on investment will be and if that return justifies the risk. To determine the return on investment (ROI), apply the ROI formula, but this will vary depending on whether you buy with cash or purchase using a mortgage.
Let’s say you bought a $260,000 house and renovated it for $15,000. You plan to collect a total of $2,500 every month in rent. Once you calculate the annual return (what you gain in a given year), divide it by your total investment ($275,000) to get your ROI. If you are financing the house, it is important to consider costs like down payments and monthly mortgage payments.
Analyze Mortgage Rates
Fixed-rate mortgage loans and variable rate mortgage loans are two types of mortgages available. Fixed mortgage rates don’t change through the life of your term, whereas variable mortgage rates vary with market interest rates and can be cheaper over time than fixed-rate mortgages. Compare the two and chose which is best for you.
Following these tips should help you in making your first investment property a profitable one.