There are ample opportunities for you to invest your money, a Gallup poll in 2019 concluded that 35% of American participants voted real for being the best choice for long term investment; whereas 27% show their satisfaction in favor of stocks as a long term investment option. If you have a sufficient amount of cash laying in a safe place and you want to make most of that money then investment in income property will be one of the excellent choices to consider.
What is Income Property?
An income property is a property purchased and created to generate and receive earnings from it.
Income properties can be for the purpose of residential, like single-family homes or multi-family properties, or they can be used for the purpose of commercial properties. Owners can earn money through holding and renting the property and enjoys its earnings, then sell it for some profit.
Once, you are determined that you want to invest with your income property, here are some tips before buying an income property.
10 Tips Before Buying Income Property:
Real estate is now Americans’ popular long-term investment strategy. These facts can easily be drawn your interest in a rental property. So, it is very important to do your homework first. Here are 10 experts tip to follow before jumping into an income property.
1. It’s Not As Simple As It Seems
To get the most of the advantages from an income property it needs an accountant’s vision, a lawyer’s understanding of landlord-tenant laws, a fortune teller’s imagination and, if you decide to manage your rental property yourself, a landlord’s firm and friendly attitude is a must.
“Where people who want to become landlords fall short is, they don’t realize how much work goes into it,” explains Diana George who was a founder of Vault Realty Group and now part of Century 21.
So before you jump in, you will want to analyze whether you can give this your time and have skill to manage your rental income. While rental property is deemed a passive investment, that does not mean you are fully passive in managing it.
2. Success Needs A Long-term Perspective
Jeremy Kisner who is a senior wealth adviser at Surevest Wealth Management in Phoenix possesses two Las Vegas rentals. The unit he has owned for 13 years has had two tenants and low maintenance, whereas the other has had three tenants in four years, the last one a costly eviction.
He is carrying the same idea he gives his clients in the form of advice.
“The way that people get in trouble with almost all investments is, they just don’t hold onto things long enough,” he says. “With rentals, if you break even on a cash-flow basis, that’s actually not too bad because you’re paying down the principal and building equity that way. Then, you hopefully also see some appreciation.”
So if you are intending to make money in real estate, you will need to believe in long term. As you pay down or discontinue principal over the years, you should be able to grow your cash flow.
3. It Is Lenient And Costly To Break The Law
State landlord-tenant laws can behave like an open manhole lid for rental owners who disobey them, according to Kathy Hertzog who is the owner of the Erie, Pennsylvania-based Landlord Association.
A case in point is tenant security deposits. It is not as easy as receiving and keeping the money.
“There is definitely bookkeeping involved. You need to have that account for each tenant and keep that money in that account and save it,” Hertzog says. “Security deposit laws govern how much time you have to return a security deposit when tenancy ends, less any expenses for cleaning and repair, all of which have to be itemized.”
“In some states, if you don’t turn that in, the tenant can go after the landlord for double their security deposit for failing to return it within the specified time period,” she says.
Of course, this is only one element of the laws containing rental property, and there are many others that landlords must know in order to stop running afoul of them. You will want to be aware of rules around eviction, fair residence, and other regulatory requirements.
4. Make Sure You Have a Landlord Attitude
If you buy a rental property, you should be your landlord over 6-10 percent of your rental income to a management service. George and Kisner like to subcontract the work.
“They do the background check on your tenant, make sure they sign the lease and pay their rent on time,” George says. “That frees you up to manage your money, not your property and tenants.”
Hertzog says that there is a potentially straight downside to being your landlord.
“If you get too close to your tenants and the tenants have financial problems, you can find yourself stuck because you don’t want to evict them,” she says. “You have to be very professional about it, because if somebody doesn’t pay their rent, they’re stealing from you.”
On top of this matter, if you are pleased making the executive consequences that must be made in managing a property, or if you fix or end up repairing that failing air conditioner or leaky dishwasher. If not then you require to have someone you manage this on your behalf.
5. Analyze Whether Buying or Financing is Best
While some financial critics claim you should never buy a rental unless you can pay cash for it, Surevest Wealth’s Kisner defends to differ.
“Leverage (that is, a mortgage) typically magnifies returns, on both the upside and downside,” he says.
For instance, imagine a rental property bought for $100,000 in cash. The house generates a rent of $12,000 yearly and is taxed at $1,000. With a depreciation schedule of 27.5 years and an income tax rate of 20 percent, an investor would receive just over $9,500 in cash annually. So the investor’s annual cash return is about 9.5 percent. Which is not bad.
Here’s how the investor using leverage performed, assuming the same house. This investor has a mortgage for 80 percent of the house, which fuses at 4 percent. After deducting the operating expenses as well as extra interest expenses, this investor earns almost $5,580 in cash yearly. With $20,000 invested, the investor’s annual cash return is about 27.9 percent.
In fact, the circumstance for the leveraged owner is a little bit good than these numbers show. That’s because part of the rent goes to pay down the mortgage’s principal. So while the investor could not pocket the cash flow because it was used to pay the loan, the investor still benefited (and paid tax) on that money.
That is the power of leverage to swing an investor’s return.
George says: “I definitely agree with going conventional (mortgage). It’s a really good way to maximize your dollars.”
6. Budget for the Unexpected
Disappointment to plan for the myriad expenditures of acquiring a rental can become a fast track to crisis.
“As a landlord, you want to save about 20 percent to 30 percent of your rental income for upkeep, maintenance and emergencies,” says Hertzog of the Landlord Association.
“You want to make sure you’re not just living off that,” she says, “because then when something big happens, you won’t have any money to fix it, and now you’re stuck because you’re a landlord with a property that needs to be repaired quickly, and you don’t have that money.”
Kisner could not agree more: “It’s been my experience that you always underestimate all the different expenses that have a way of coming up and always overestimate just how positive the cash flow is going to be,” he says.
7. Do Not Forget to Renew Your Leases
If landlords have one blind spot, it is the failure to renew tenant leases on time, according to George.
“You’d be surprised how many landlords don’t renew their leases every year, so they’re letting their tenants go on month-to-month leases,” she says. “What’s wrong with that? What’s wrong is, their whole thinking is that now, if I want to get my tenant out, I can’t because now they’re not strapped to a lease.”
“Also, they can’t raise rent,” says George. “The only way you can change rent is if you have them sign a form changing the lease every year. That’s how you keep your tenants in check. When you let it slide like that, it can be really difficult to get your tenants back on track,” George says.
Depending on the country, landlords can give notification for eviction for a mentioned period. In California, where George is based, the state permits landlords to give 60-days’ notice for tenants who have stayed in the property for more than a year or 30 days for less than a year, though the circumstance may vary in rent-controlled cities. The landlord also might propose a new lease contract at the same time.
8. It is All About Location
That old realtor saying about the significance of location pertained to income property.
“The best locations with the most appreciation are where you’ll potentially have the worst cash flow with a rental,” Kisner says.
Investors can earn a return in two ways: cash flow and appreciation. In some regions, investors may want a higher cash flow in order to compensate them for slower appreciation. But if investors expect an area to appreciate substantially, they may be willing to forgo some of the cash flow in order to enjoy that appreciation. The result: house appreciation outstrips the growth in rents, and houses appreciate while yielding relatively low cash flow.
“As a result, the property has to appreciate more in order to compete as an investment with properties in less desirable areas,” Kisner says.
His solution: Err on the side of appreciation. That is what he is doing with his two rentals, which, in a good month, barely break even. “But if I hold them until I turn [age] 60 when they’re paid off, even after property taxes and insurance, I’ll double my Social Security income,” he says.
9. Consider Section 8 for Ling Term Tenant
Unexpected tenant vacancy is the headache of every rental owner.
“Each month that a rental stands vacant, you’re having to pay mortgage, utilities and maintenance out of your pocket, so turnaround is one of the things you need to address really quickly,” Hertzog says.
One easy solution, give Section 8 renters a try.
Section 8, also known as the Department of Housing and Urban Development’s Housing Choice Voucher Program, typically caps the rent for low-income Americans who qualify at 30 percent of their revised monthly income. While some landlords are doubtful of the paperwork and potential maintenance problems illustrated by some Section 8 renters, Hertzog views Section 8 tenants favorably.
“Older populations and persons with disabilities are usually excellent tenants. They take excellent care of the property because this is their home. This is where they want to be. Plus, if they don’t pay their rent or ruin your home, they risk losing their Section 8 voucher,” she says.
10. Remember Rental Property At Tax Time
There a a rare ray of sunshine that beams down upon income property owners each spring as they comes down with their accountant to prepare their federal income tax return.
“When you have your own home, you can write off the interest and that’s about it,” George says.
“But when you own an investment property, your Schedule E tax form enables you to write off nearly everything under the sun, from painting the home to changing the light bulbs.
“So, even though you have rental income to report, you can show less income than you’re actually collecting and write off your mortgage payment and interest while building equity at the same time,” George says.
It’s that strong blend of tax benefits and investment returns that enable keep investors interested in rental properties.
Benefits of Investing in Income Property
Below are some benefits of investing in income property.
1. You are In Charge
You select what property to finance in, which tenant you will rent to, how much you will have hold in rent, and how you will manage and maintain the property while renting it to tenants. You can use services that can provide short term vacation stays or use a property management company to enable you to learn and service long term renters.
2. Property Appreciation
One of the most outstanding alternatives about investing in real estate is that you can use a small amount of your own money while borrowing the rest, often four to 20 times more, from a lender. This is called leverage. If you buy a property using considerably more debt than equity, the investment is said to be “highly leveraged.”
3. Money in Your Hand
If you plan to place tenants in your investment property, you will be able to earn rental income. Any money left after spending on your expenditures will be money in your hand.
For example, you have a tenant whose rent $1,100 a month and your PITI mortgage payment is $700 a month. Thus, deducting $700 from $1100 will give you $400 for saving into your pocket each month.
From this $1,100, assume about 5% in monthly costs of maintenance and 5% in the costs of vacancy. Therefore, you should put $110 into a selected bank account each month to handle maintenance issues and possible vacancy costs. When all is said and done, you will have about $290 each month in gross profit.
$1,100 (monthly rent) – $700 (monthly PITI mortgage payment) = $400 -$110 (for maintenance and vacancy issues) =$290 (your monthly passive income from the rental property)
4. Tax Benefits
Investing in real estate gives you a wonderful alternative to access an arrangement of rental property tax deductions. Some of them are:
- Interest: As a landlord, you can subtract interest from existing mortgage interest payments used in buying the investment property.
- Repairs: You can subtract the cost of repairs in the year they were carried out. If you repair the door or repaint the building, the costs can be subtracted.
- Depreciation: When the rental property is giving income, then you can get a tax benefit for owning a rental property, which is accomplished by way of depreciation. To this end, landlords can subtract the cost of the property in years to come.
- Insurance: Another advantage that comes easily is reductions from insurance premiums regardless of the insurance policy that is attached to your rental property. This may include flood/fire/theft insurance or landlord insurance.
5. Sell Whenever You Want
The real estate market gives you the chance to sell when you want to and whichever way you want. However, experts would recommend you to hold on to your investment property over the long-term—even though there is no hard and fast rule in this market. The decision to sell is completely yours. There are several exit strategies available to improve earnings. Because of appropriation, you are likely to sell your property at a huger price than you purchased it, which is why owning a rental property is one of the best outcomes to prefer right now.
There is not better option to generate your earnings and fulfill all your financial purposes. Owning a rental property can achieve that dream, and all the ambitions for a good life will be at your beck and call. Invest today either in market properties or off-market properties, and collect the fruits in years to come.