Have you been contemplating investing in real estate? It certainly has an allure, especially when the property market is strong and investors are seeing high returns on their initial financial outlay. Maybe you’re interested in purchasing a multi-plex residential building, an apartment complex, or a commercial building.
Before you start estimating the potential monetary returns, however, there are a few factors to consider.
1. Property type
Spend a little time thinking about the type of property you want to purchase and what’s motivating you. Imagine how the building will be used. It could be that you’re a small business owner and have been searching for the ideal office or storefront for your company. Perhaps viewing the prices on commercial real estate could have you dreaming about buying a commercial building and using one of the spaces for your enterprise while leasing out the others.
You might see yourself owning a tri-plex apartment and renting the units to individuals or families. On the other hand, your interest in real estate could relate to buying land that you can lease to people for multiple purposes.
2. Current market conditions
If you are based in California, for example, it’s essential to be up on market conditions in the state before you seriously start to plan your purchase. (The California Association of Realtors is an excellent resource for this.)
Study the selling price of the types of properties that pique your interest in your target communities. Next, research information about year-over-year market trends. This will tell you if properties are selling faster than similar ones during the same time last year. You’ll also get an idea of whether prices have held steady or increased compared to previous years. Doing your homework helps you better understand what’s going on in the marketplace and time your investment accordingly.
3. Investment amount
This is an important question. How much capital do you have available to invest, and considering what you’ve learned, will it be enough to buy what you want? Most likely, you’re planning to have a mortgage on the property you purchase. Therefore, you’ll have to meet the lender’s criteria.
Your only experience applying for a mortgage might have been for your family home. If so, take note that to qualify for a loan on an investment property you’re typically required to come up with a larger down payment compared to what you needed for your primary residence. Expect to be asked to put down up to 20 percent of the purchase price—unless, for example, you’re purchasing a multi-plex apartment building and will be living in one of the units.
4. Tax implications
The good news is that there are tax advantages to owning an investment property. You’re able to claim the amount of interest you pay on your mortgage. Plus, you can write off any day-to-day costs related to renting the building. This covers things like repairing plumbing, replacing appliances and other items, and general maintenance of the building and grounds.
This means that you must keep detailed records. You might also consider benefiting from the assistance of a professional bookkeeper or chartered accountant. There can be a lot to know about tax filing in this situation, and you don’t want to miss anything.
5. Commitment length
Think ahead to decide how long you’re going to be owning the property. In most cases, investing in real estate is a long-term financial commitment. In part, this is due to the significant associated costs when you buy and sell real estate. Seeing a return on your investment usually necessitates hanging on to the property for a while.
The purpose of your purchase comes into play here too. Perhaps you intend to fix and flip a home to take advantage of a hot housing market. Nevertheless, remember the longer you hold onto the dwelling you’re renovating, the more time passes before you can make a profit on the sale.
6. Ongoing costs
The ongoing cost associated with owning your investment property needs to be calculated as well. Some, such as utility charges, property taxes, and general fees for upkeep can be forecasted fairly well. Be mindful that there’ll always be some expenses that you can’t anticipate. Plumbing leaks can cause water damage, heating and cooling systems can break down, and a host of other issues can occur.
If the circumstances are such that the building is unusable for a few weeks or longer due to repairs, you’re not going to see any rental revenue during that time. That’s another cost that’s hard to predict. While you should have insurance, you must be prepared with some emergency cash. This will make it easier for you to cover the deductible on your insurance claim and weather losing rent money for a time.
Certainly, buying an investment property can be a great decision. Be sure to do some detective work and take your time to achieve the best outcome.