Should You Buy an Investment Property?
Successful real estate investors will tell you that buying an investment property is a smart move. Investing in real estate is a great way to establish a steady income stream, build equity when the property appreciates in value and enjoy major tax benefits.
But there are also some disadvantages that you should consider. You need enough money and time to devote to your investment property, and you will have to find good tenants. You should also know how to make repairs – or pay someone to make them for you.
The first step when you are thinking about buying an investment property is to contact a real estate agent who knows the local market. Your agent can recommend an appraiser who can give you an honest price evaluation on the property along with experienced workers who can estimate the cost of repairs and improvements.
Pros of Buying an Investment Property
Assuming that you find a property in a good location and you buy it at a good price, there are many advantages to investing in real estate.
- A Steady Cash Flow
One of the main reasons investors buy rental property is for monthly income. When you have a reliable tenant, you will have a steady income stream that can help you build wealth and provide you with more financial security.
When your income is more than the expenses on the property, you are said to have cash flow. Expenses include your mortgage payment, taxes, insurance premiums and maintenance costs. So if the property generates $1500 each month and your monthly expenses total $1000, you are getting $500 in cash flow.
2. Property Appreciates Over Time
When you buy the right investment property you can expect it to appreciate in value, so when it comes time to sell, you will have a positive return on your investment. Many properties go up in price naturally when demand is high and the supply does not increase. There are some things you can do to increase the value, like upgrading the bathrooms and kitchen or adding a deck. Keep in mind that you will build equity as you pay down your mortgage loan.
3. You Get Tax Breaks
There are major tax advantages to buying an investment property. You can deduct expenses like property tax, mortgage interest, maintenance and repairs. You can also deduct advertising for a tenant, legal fees and travel to and from the rental property.
Investors can take a depreciation deduction for 27.5 years, assuming an incremental loss of the property’s value due to wear and tear. However, when you sell, you will have to pay income tax on the depreciation you claimed, unless you use a tax strategy like the 1031 Exchange to defer your capital gains tax. If you hold the property for a year or more, you pay long-term capital gains instead of short-term capital gains tax, which can be significantly lower.
4. There is Less Risk
Real estate tends to increase in value over time, so it is less risky than other investments like the stock market. There are times when prices drop nationwide, but these occurrences are rare. Sometimes, in certain markets, you will see no growth for a period of time, or a small decrease in the value of your property. But if you are smart about choosing an income producing property for investment, you are much more likely to see appreciation in value over time.
5. You Have Leverage
Leverage is the art of using borrowed funds or OPM – Other People’s Money - to increase the potential return on your investment. By using leverage, you can purchase a property that costs more than you have. Or, with leverage, you can spread your cash across multiple properties.
Cons of Buying an Investment Property
Buying an investment property can be a very good move, but there are some drawbacks to think about.
- You Need Cash to Start Investing
When you are thinking about buying an investment property you will need to have enough money in the bank for a down payment – possibly 10% of the sale price or more.
You will also need money for repairs and improvements, and to advertise the property to attract renters. The rule of thumb is to have three months’ rent in reserve if the property remains vacant, along with 10% of the monthly rent to cover maintenance and ongoing expenses.
2. You Have to Deal with Tenants
As a landlord, you will have to find potential renters, perform background checks and deal with issues that are likely to come up. For example, if the heat goes out or the toilet is not working, you are the person the tenant will call. Also, tenants may pay rent late, or not at all.
3. You Need Time
When you invest in real estate you need time to look at properties to find the one that fits your needs. It takes time to examine the property, secure financing and negotiate with the seller. Then you have to prepare the property for renters and collect the rent when they move in.
The bottom line is that you can do very well investing in a rental property with the right advice and support. Michael DeRosa Exchange can help you make smart decisions about buying and financing your investment property. Whether you are looking to buy and hold, fix and flip or wholesale your investment property, we can help. With offices is New York City, Skaneateles and Owasco, NY, we can service the entire state of New York.
Kelli Ide offers a unique, concierge-style approach to real estate, including staging, photo styling and market preparation services exclusively for clients to give them an edge over the competition. For further information about buying or selling a home, visit kelliide.com.