Acquiring an investment property is a complicated process not only in regards to lending, but also emotionally. With such benefits of owning investment property such as increased net worth, monthly cash flow, tax benefits, etc… comes the cons. Bad tenants, repairs, improvements, vacancies, just to name a few. By reading this publication you will gain the mental foundation required to prepare you emotionally and financially to make the decision of venturing into the exciting world of property rentals.
Before we begin, I want to make sure you let all prior stigmas about property rentals out of your head. When I usually sit down with new investors they almost always bring up stories about their cousin’s, best friend’s, uncle’s brother who told them that they shouldn’t invest in property and they go on and on about their reasons why. Let me just say that a majority of those story’s stem from bad preparation, insufficient knowledge of real estate, bad timing, bad guidance, or just simply bad luck. Sometimes people just don’t have what it takes to be a landlord and if that is the case I’ll explain other techniques that will allow you to profit, but delegate the responsibilities of being a landlord to somebody else.
Free your mind of these stories and let’s get you prepared to tackle this new adventure the right way. I also want to point out that this publication is not about flipping property, it’s about buying property to hold and rent out for a long period of time. If you’re interested in flipping property check my Facebook page regularly to find information, tips, strategies, and offers from myself and other property flipping experts.
Why buy an investment property?
There are many reasons why people decide to own investment property , but the most common would be to establish an additional avenue of monthly cash flow and also, to build an additional asset to prepare themselves for retirement. Cash will always be king and property rentals can bring that residual form of income to reality. The sweeter the deal the greater your monthly cash flow will be. That’s why it’s so important to do your homework on each and every property you decide to bid on. I will publish a second part to this publication giving you an insight to the mechanics of an investment loan, a tool usually necessary in purchasing your next investment home.
An asset that is managed correctly will be a nest egg to your financial freedom. The sooner you purchase (in the right market of course) the sooner your investment will start producing for you. Check the stats, Real Estate has out produced the majority of other investment vehicles not only in rate of return, but risk level as well. By reading this you’re already heading in the right direction.
Tax benefits
Ah yes…how could we forget Uncle Sam? Investment property can save you a bunch of money in income taxes by utilizing tax laws from new mortgage interest deductions, property taxes, improvements, repairs, etc… You may soon find yourself in need of deductions to lower the amount that you have to pay in income taxes every year. For instance, when someone already owns a home, but their income has recently increased will need more tax deductions. A single property will usually not outweigh the higher income tax rate. Other people have paid their current mortgage so low that all the tax benefits are nearly extinct. Property rentals can be a good source for a tax deduction which ultimately equates to higher cash flow.
Next, I will explain some of the factors that must be taken into consideration before moving forward with any property. These factors can affect your profit and pocket book if you’re not prepared.
Vacancies
When you look for a rental property, location location location come to mind. Purchasing a property in an area that has a higher chance of obtaining a tenant should be priority. This will cut down on your vacancy rate and will also allow you to have multiple potential tenants to choose from. Ideal locations include, but are not limited to: near schools, within popular city attractions, desirable suburban locations, and well known neighborhoods, etc… For example, I bought a rental property in Texas near a very popular medical facility and university located in a gated community. Students from all over the country fly in this location to attend this school and therefore, my vacancy rate is extremely low. When one tenant leaves I have a waiting list of people wanting to live in that neighborhood and since the property is within a gated community my tenants feel safe and prideful to be in that community. Most of these gated communities will have a Home Owner’s Association fee (HOA) so always remember to factor that cost in. Don’t be afraid of an HOA fee, just make sure the whole deal makes sense.
Monthly cash flow
You must also evaluate the property to find out if the comparable market rent amounts are high enough to give you a monthly cash flow (income). Monthly cash flow is important as it will determine if the property you are buying will be a performing asset. If you are putting money out of your pocket to cover the mortgage because the rent that you receive is in sufficient then you have a property that is costing you money instead of making you money. This can be dangerous because not only are you losing money on a monthly bases, but you are are also not saving money for those unforeseen circumstances such as repairs. When you property is producing a cash flow , you can now strategically save that money in a separate bank account for such events as vacancies, property repairs, property improvements, etc… It’s inevitable that some of these issues will come about and having those new reserves will save you a lot of grief and keep your personal bank account healthy. If your current property is not producing cash flow and you are dipping into your own money to cover the mortgage click here for possible solutions.
Increased value leads to a bright retirement
A mortgage is a liability, but a property is an asset. Managing both of them incorrectly is like heating your house with the windows wide open. Choosing the right rental property in the right location will put you in the position to profit from increased value later down the future. When the value of your property increases your equity also increases. Equity is the difference between the value of the house and the balance of your loan.
There are three ways that an investment property will help you when you retire. One, as you make the scheduled payments and hopefully a little extra towards principal, your loan’s balance is slowly decreasing and getting closer to being paid off. By adding additional amounts toward your principal the scheduled interest begins to drastically decrease cutting down on the amount of time it will take to pay off the loan. Once the loan is paid, the whole rent check (minus property taxes and insurance) will be an income for you. The second, is another option that you can take depending on the current housing market we’re in when you decide to retire. If the market is strong and favorable for selling you can take the option of selling the home for a profit. The third option, is to leverage the equity you’ve gained over time to strategically purchase more rental properties in efforts of increasing your monthly cash flow (income).
Borrowing power
Just like your primary residence, you can borrower against the equity in your rental property. The rules are more stringent and the terms are a little less desirable, but it’s an option that is worthy enough to use to leverage your money.
Management Companies
As I mentioned earlier, with all the benefits of owning rental property come a great deal of responsibility and a few headaches. Some of these responsibilities and headaches can be taken away by hiring a trust worthy property management company. The responsibilities of a property management company are accounting, repairs, evictions, service notices, etc… Each management company charges a fee for their services and it can range between 6-12% of your rent. This is an option worth looking into, especially if your property is out of state.
In conclusion, owning investment property can be your nest egg for a bright retirement. Be prepared both emotionally and financially and you’ll have self sustaining rental property in no time. Check back regularly to get the second part of this publications which will include the mechanics and specifics of investment loans.
