| Real Estate Investment |
|
What is an investment property? An investment property's main function is to generate income. There are many ways to generate income through real estate. The following is a list of a few types of investment properties:
Rehabilitating a piece of recently purchased property with the intent to sell for a profit is another popular type of real estate investment. Often times real estate investors will buy properties, rehab them, and lease or rent them out as well. The type of real estate investment you choose to make will depend upon some of the following factors:
Why Should I Invest in Real Estate? There is always an opportunity available to generate income through real estate investment. If you are willing to do a little extra research, consult professionals and learn as much as you can about the opportunities available in your local community you can generate income. Over time real estate appreciates. The national sales price average has gone up and down but over time has gone up. Over time your property value will increase adding to your personal wealth. When you are able to rent out your investment property for more money than you pay out per month on it you will have a positive cash flow. Positive cash flow from an investment property adds to your monthly income while you build equity in your property over time. There are also many tax benefits to real estate investments. Talk to an accountant.
Will Real Estate Investment Work For Me? Throwing in an investment property into your already full portfolio may not be the best choice. You should talk with an accountant or financial adviser regarding the affect an investment property would have on your finances. Here are some good questions you should consider before purchasing an investment property:
Not only do you need to think whether an investment property makes financial sense in your life but also whether being a property manager will fit your life style. An investment property is large responsibility. More than likely your investment property will need updating over time and you can expect at some time an appliance will break or the carpet will need to be replaced or something will need to be fixed. You will also need to deal with your tenants who may end up being very clean and responsible or may end up putting holes in your wall and calling you at 3 am because the toilet is clogged. For those who may not want to or have time to deal with the work associated with an investment property you can always turn to a professional property manager. Typically property manager's are paid in the range of 5% - 10% of the properties gross income.
Finding Your Investment Property Prior to searching for an investment property make sure you obtain a loan pre-approval from a mortgage consultant. With a loan pre-approval in hand you will have a defined price range in which to search through and estimated monthly payment which will help you calculate your rental cash flow. Obtaining a loan pre-approval will save you time and money. If you are interested in purchasing an investment property you are doing so in order to make money. When most people purchase a home to live in they do so based on an emotional decision. When purchasing an investment property it is vital that you concentrate on the defined numbers of dollars and cents, not how much you like the color scheme or layout. Here are some helpful hints for what to look for in an investment property:
Consult a Realtor. A Realtor can complete most of the research for you, saving you time and money. A Realtor also has the working knowledge to help ensure that you stay out of trouble and that the transaction runs smoothly. Important Information You Need To Know Landlord and Tenant Laws are state laws that were created to protect both the landlords and the tenants rights. The rules and guidelines do change under different conditions so it is important that you are very familiar with it. The Federal Fair Housing Act passed in 1968 and was then amended in 1988. The law bans discrimination in finance, rentals and sales based on race, color, religion, sex, national origin, disability, or familial status. Each state also has it's own set of protected classes to go along seven federally protected classes. Consult a legal representative if you have any questions.
The most important aspect of an investment property is the amount of money you make off of it. Cash flow is one way to make money off of an investment property. In order to calculate your cash flow you must add up all of the costs associated with owning an investment property and then subtract them from the rental amount you bring in. Costs generally include the following:
In some instances it may be more beneficial to own an investment property with zero cash flow or even negative cash flow in return for potential profit down the line. Here's an example: You have found an area in which properties in that area, after doing all the research, you feel will appreciate at a rate of 10% per year for next few years. You have little money to put down and end up purchasing a 3 bedroom, 2 bath property for $100,000. You were able to negotiate the seller paying for closing costs and you ended up paying a 3% down payment on a 30 year fixed rate loan with a 6% interest rate. Your monthly expenses break down as follows: $581 - Monthly Principal and Interest $175 - Monthly Property Taxes $60 - Monthly Home Owner's Insurance $30 - Monthly Mortgage Insurance $100 - Monthly Water Bill $25 - Monthly Marketing and Advertising $50 - Monthly Maintenance $1,021 - Monthly Total Costs After some research you realize you are able to rent out your property for $800 per month and you have signed the renters to a one year lease in which you pay the water and they pay the rest of the utilities. Your monthly cash flow: $1,021 - $800 = - $221 per month You have a negative cash flow of $221 per month which adds up to $2,652 of costs per year. Two years have passed and you have decided to sell or refinance your property. Instead of the estimated 10% appreciation the property has appreciated 8% per year. Your property is now worth $116,640 after two years at an 8% appreciation rate. $5,304 - Total Costs After 2 Years $16,640 - Total Increased Value After 2 Years $11,336 - Total Profit After 2 Years Despite a negative cash flow because you chose a property in which appreciation rates were high you were able to make a substantial profit after two years by either selling your property or refinancing and pulling out a home equity loan to avoid taxes which occur when you sell your property. Before purchasing an investment property talk to an accountant. There are several important tax laws which apply directly to real estate investment and understanding them can save you money. MikeKnowsOmaha can help you with all of your Omaha Real Estate needs. To request more information or submit a question please click here |
