As in most investments, you will need a down payment and the ability to borrow
money to acquire an investment like this. Unless you have a substantial down
payment, you can expect to subsidize the monthly costs for the property for
several years, until the rent covers your ongoing costs. Make sure you have a
good understanding of the financial impact this investment will have. What is
the interest rate you are going to be charged on your loan? What is the cost of
utilities? How will you handle a rental vacancy? If you have to subsidize the
investment, what will be the impact on your personal finances? Owning an
investment property is like running a business, so it is best to have a thorough
understanding of what you are getting into before you buy.
What is the best type of investment property to buy? First and foremost, buy
something that you can afford. As mentioned above, you may have to subsidize
your investment for a while, so price is very important. Research rents and
prices in the area that you are looking to buy in. Nearby sales and rents will
give you some idea of the value of comparable rental properties. Other factors
to consider include the location of the investment. If possible, it should be
the least expensive home in the best area. Also, investigate how much growth
cities are allowing in your area. If your city has strict growth control, but is
a popular area to live in, demand for housing will outstrip supply and the value
will go up. University towns with a large student population living off campus
create tremendous demands on housing, forcing up both the cost of investment
property and the rental income. Properties that need fixing up can also be good
investments, especially if you can do the repair work yourself to create added
equity.
If you are dealing with a fixer-upper, make sure that you personally inspect the
property so you have some idea of what you are buying. Better yet, have the
property professionally inspected. Home inspectors are trained to inspect homes
and locate problems that the average homeowner may not see. Based upon these
inspections, you should be able to make an informed decision on whether a
particular property is a good buy or not.
If you are an active investor, you will probably want to manage your own
investment property. It is important to keep in mind the numerous legal
technicalities that must be complied with in managing rental properties. If you
are comfortable screening applicants, adhering to rental laws, and doing routine
maintenance, then you can probably handle your own management. However, if you
are not comfortable with these issues, then a property manager is the person to
assist you with your management. Property managers charge fees for their
services, but they can insulate you from the day-to-day problems of managing a
property.
The tax consequences of investment property ownership are complex and are best
left to your tax professional for determination. As a quick overview, however,
most of the expenses you incur in the course of running your investment property
are deductible against the investment's income. This would include repairs, real
property taxes, loan interest, utilities, and depreciation. If you own the
property long enough to qualify for long term capital gains, you will be subject
to capital gains tax at the time you sell. These taxes can be deferred if you do
a tax-deferred exchange for other investment property, or can be spread out over
several years if the sale is accomplished under the installment sales rules. For
specific information on investment property ownership, and its impact on your
financial situation, please contact your CPA or other tax professional.
The information presented here is for informational purposes
only and should not be interpreted as tax, legal, or investment advice.
Individual cases are all different, so this information should be used only in
conjunction with the appropriate professional advice.
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