Aside from owning a business, owning rental property has been one of the top investment choices for people, most commonly done through buying a second home. Handled right, income properties can generate significant gains for investors, both in terms of real estate appreciation as well as monthly income from tenants. However, it’s not sure a surefire approach to financial success. There are a lot of ways that a budding real estate investor can go sideways with an investment property home purchase as well.
Watch Out for the Seller-Renter
Many times people will sell a home but then offer to rent it from the buyer, essentially trading their home title for ready cash but not really moving out. These situations come up a lot where someone wants to stay where they are but doesn’t want to deal with a mortgage anymore and would rather rent. They are also frequently listed as buyer-direct home sales versus using a traditional route through a real estate agent and broker. The big risk here is that the seller is able to unload the home on the buyer, and then stop paying the rent a few months in. The deal allows them to avoid foreclosure but then it becomes the landlord’s problem to actually evict. By the time the legalities are done and eviction is finally achieved, many landlords have taken a loss on the property and end up selling again. It’s better to have a clean sale with no further obligation between the parties and start with brand-new renters altogether.
Have a Good Strategy Ahead of Time
There are different ways to make a net profit from a rental property. Depending on the cost of financing, down payment and expectations of holding a residential property the driver for profit can be different. Some expect to make a gain both from rental income as well as equity growth. Some realize with the cost of financing, the better plan is to use rental income to pay for the mortgage as much as possible and make the net gain on the property equity appreciation over time. How long a property will be held can come into play as well. Knowing going in what one’s strategy is can help avoid mistakes once a commitment has been made or being surprised if the market has a downturn etc.
Tax Benefits are Different
An income property doesn’t get the tax same deduction benefits of a first home. The mortgage interest deduction, one of the biggest tax benefits possible for an individual is not possible with a rental income property. However, if you are operating your rental property purchased as a business, many of the expenses of running that business can be deducted through the Schedule C form process with an income tax return. Check with a tax advisor or attorney to be sure for your specific situation and interests.
Owner Responsibilities
Just because you rent the property doesn’t mean you’re off the hook. As a new buyer and owner, you’re still responsible for the property taxes due, HOA assessments, utilities and other costs tied to the property. Unless you contractually make the renter responsible, the tax, HOA and utilities will address the property in your name as the owner. Some forget this fact and get a nasty surprise in the mail with a tax or assessment lien on their property.
In short, buying a second home as an income property has the potential for significant investment gain, but it doesn’t operate on auto-drive. You need to still be involved quite a bit and watch whom you rent to when protecting your property interest.
Purchasing an investment property is one of the most important decisions that you'll ever be a part of. As such, it's a necessity to make your decisions with only the most careful of consideration.
Here are the six tips that you need to heed in order to ensure that you don't get fleeced.
Find The Right Property At The Right Price
Yes, this is a whole lot easier said than done. However, it's not impossible. All it takes is some patience and research.
You have to determine what everything in your area is selling for in order to be able to spot a bargain! Further, you need to know that various property classes will outperform each other. For example, land and home units will appreciate differently.
Figure Out The Cash Flow
It's always a good idea that you know how to maintain your mortgage repayment obligations over the long term. It's recommended that you analyze the cost of servicing any loan only on an after-tax basis. By taking this approach, you have the power to calculate and put the cost into actual terms that make sense for you.
Look For A Good Property Manager
Finding a good property manager who is a professional in his or her field is vital. Your property manager's job will be to make certain that everything is in order between you and any of your tenants. A good property manager can extract the best possible value for you from your property and help to keep your tenants in line as well.
Choose The Appropriate Type Of Mortgage
There are many options available for financing the investment property that you choose, so it's best to get sound advice. Options such as a variable rate loan and a fixed rate loan are both popular choices, but your specific circumstances will dictate what's most suitable for you. Consider that variable rates often end up being cheaper over time, yet fixed rates at the right time are ideal.
Take Equity From Another Property
Leverage the equity from your residence or another investment property. Doing this is actually an ideal way to purchase your investment property. Equity can be calculated by way of calculating any difference between what you owe on your mortgage and the overall value of your property.
Comprehend Both The Market And Dynamics When Buying
It's best to analyze what other properties are available in the area when you're looking at an investment property. It's very advisable to actually talk to both local people and real estate agents in the neighborhood. They can give you hints on small, yet vital, things like which side of a street is considered more desirable.
These are the six tips to help make sure that you don't ever get fleeced when buying an investment property. They can make the difference between purchasing a great property that has a high return on investment and purchasing a lemon.
Call your trusted mortgage professional today for some answers and more information.