Benefits Of Buying An Investment Property
Tax benefits are one potential benefit of owning an investment property. As part of a negative gearing strategy, you may be able to claim deductions on your maintenance costs and other outgoings such as repairs, mortgage interest and rates.
Another benefit of continuing to rent is that you may be able to live in a better property or area than you could afford to buy. Rents in high-end homes tend to be less than your mortgage repayments would be should you buy that home. So you could buy your investment property in a more affordable suburb while continuing to live in your preferred area.
How Negative Gearing Can Reduce What You Pay In Income Tax
If your property is negatively geared , the loss can reduce the amount of tax you pay on your earnings at tax time.
To give you an example, say you earn a salary of $70,000 and a rental income of $20,000 over a 12-month period. If your net rental property expenses are $35,000, your rental property loss will equal $15,000 for the year, which means youll only pay tax on $55,000 of your salary.
If your property is positively geared on the other hand youll have to pay tax on the net income the property generates.
Financing Part Ii: Rental Property Loans
One advantage to rental property loans is that they are generally more collateral based than borrower based. That means the lender will be primarily looking at the rental property itself, and how good the deal is, rather than scrutinizing you as a borrower.
Many investment property loans dont even require you to document income!
As for credit requirements, most rental property loans have minimum credit requirements. Expect minimum credit requirements to be between 620-660.
Interest rates for investment property loans will also be higher than those for a homeowner mortgage. You will likely pay between 5-10% in interest to investment property lenders.
When youre ready, weve put together a simple page where you can compare rental property loans side by side. We break down credit requirements, down payments, interest rates, and other rental property loan terms.
Free Masterclass: Financial Independence in 5 Years with Rental Properties
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Building Up A Team Of Real Estate Professionals
As you prepare to buy your first investment property, youll want to start building up your real estate team. This includes people like a real estate agent, property manager, handyperson and preferred lender or mortgage broker. Your team can help make sure that you have the knowledge and know-how to be successful in your real estate investments. Having a good team is especially important if you are new to real estate investing and/or you are investing in an area far from where you actually live.
How To Finance An Investment Property
If you dont have the funds to purchase an investment property outright, youll need to take out a loan. The types of loans available depend on what type of property youre financing and the occupancy status.
For example, as a first-time homebuyer, you may benefit from an FHA loan. These loans are backed by the Federal Housing Administration , which allows lenders to offer more favorable terms. Its possible to qualify for a down payment as little as 3.5% with a credit score as low as 580, for instance. FHA loans are available on properties with up to four units. However, you have to occupy one of them to qualify.
Another option is a conventional mortgage loan for an investment property, which works similarly to a mortgage on a primary residence. However, the eligibility rules may be stricter. Typically, you need to have even stronger finances than for a conventional mortgage to qualify, Shin said. That means stronger credit, assets, and cash reserves.
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A Real Estate Executive Weighs In On Buying A Rental Property In A Rising
With rising mortgage rates and home prices, it may seem like a terrible time to invest in real estate, but there’s a lot more to the story. In this video, Matt Frankel, CFP®, asks Kevin Ortner, president of rental platform company Appreciate , if it’s a good time to get started.
*Stock prices in this video are as of Nov. 18, 2022. This video was published on Nov. 25, 2022.
The Motley Fool has a disclosure policy. Matthew Frankel is an affiliate of The Motley Fool and may be compensated for promoting its services. If you choose to subscribe through their link they will earn some extra money that supports their channel. Their opinions remain their own and are unaffected by The Motley Fool.
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When Your First Home Shouldnt Be An Investment Property
If you have an unpredictable income, high debt load, or little savings, buying an investment property for your first home can be risky.
You may be better off purchasing a smaller starter home and working your way up to a larger property. Also, consider whether you have the time and patience to manage multiple units and tenants. If not, youll need the extra funds to hire a property management company. Or youll need to focus on investing in a property for the equity .
Consider The Down Payment
Its also important to weigh down payment requirements. If you have bought a family home, youll only need a down payment of around 3% of the houses purchase price. But the down payment requirement is much higher if youre buying an investment property.
Purchasing your first investment property means tabling a down payment of no less than 20%. You might be wondering about the discrepancy. Its because mortgage insurance does not apply to investment real estate.
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Other Ways To Invest In Real Estate
There are many different ways that you can invest in real estate, and both risks and benefits to investing in different forms of real estate. If youre not sure that buying an investment property and actively managing it is for you, there are ways to still invest in real estate. One way to do that is through investing in REITs. REITs are a way for investors to get the benefits of investing in real estate without having to actively manage their own investment properties.
Choose A Relatively Cheap Home For Your First Investment Property
While you might envision getting your dream rental property, its best to take it easy the first time around. Even after buying your investment property, youll find theres a lot to learn. So, find a property priced far below what you could technically afford. Remember that the purchase price is just one cost associated with buying an investment property.
Youll also need to invest in repairs and remodeling before finding tenants. Then there are the property taxes youll have to pay. Spending below your means also means minimizing your risk profile, which makes sense should the real estate market tank.
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Do: Know The Different Types Of Properties Before Buying Your First Investment Property
You cant just decide on buying your first investment property without knowing the different types of investment properties out there. Not only do you need to know the different types of properties but you need to know about the different investment strategies in order to see which one is most suitable for you. Dont panic! There is a way to simplify your search and thats by using Mashvisor. With Mashvisor, you can find out which type of property is the best option for you and which investment strategy you should choose. Just type in your desired location and begin exploring all your options easily.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
Dont Forget Homeowners Insurance
Accidents come in all shapes and sizes. Dont place unnecessary risk on your newest investment purchase by failing to obtain homeowners insurance. Just as you did with the property managers, be sure to call around and speak with a few local agents to compare prices, packages, and of course, coverage.
In addition to homeowners insurance, new landlords should carry an umbrella insurance policy. This type of policy offers a secondary layer of protection in the event of an unexpected accident or unforeseeable lawsuit . These insurance policies will protect, not only your new rental property, but also your other investment assets in the event of an accident or lawsuit.
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Finding A Property Specialist
When youre about to make a big decision like investing in real estate, you need to be able to trust your real estate agent. Agents can offer insights and experience, and reduce the amount of stress you might be feeling, by helping you focus on whats really important.
However, you must be aware of property groups and property spruikers that make massive commissions from putting people into this type of asset, usually against their direct benefit.
They should be professional, punctual, and dependable and offer support and advice during every step of the process.
You should look for an agent who is able and willing to meet your requirements and needs, has knowledge of the market, can provide you with positive references from previous engagements, and is happy to talk to you in an honest and direct way about the current situation in the real estate market without using jargon or over exaggerations.
After making a shortlist of agents who seem appropriate, you can decide if you like them by asking a few simple questions like:
- What is your experience as a real estate agent?
- How long have you been working in the area?
- Do you normally represent sellers or buyers?
- What are your strengths?
- What strategy do you recommend for me?
If the agent doesnt build rapport or makes you feel uncomfortable, its time to move on they will be your partner in a very important decision and you have to be able to trust and communicate with them during the entire process.
What To Know Before Buying A Rental Property
Buying rental property can be a great way to invest for the long term and generate monthly income.
Like any investment, research the pros and cons before making any decision and be clear on what your goals and risk appetite for owning rental property are. Here are some key questions and tips to keep in mind as you contemplate making a purchase.
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Be Honest With Yourself: Can You Afford It
Before setting your mind on purchasing an investment property, take stock of your current financial situation. If you have significant student loans, medical bills, or other major debt, you might consider paying that down first.
Youll also need to factor in all the various costs of purchasing and owning an investment property. Beyond the down payment and mortgage, you will need to pay closing costs to secure the property. Beyond that, youll need funds to cover annualproperty taxes, maintenance, and repairs, as well as various costs associated with securing reliable long-term renters .
Two Main Investment Strategies:
1. Traditional: This type of investment strategy is used for long-term rentals and they are the most common types of real estate properties. A long-term rental is purchased with the purpose of renting it out for a long period of time.
2. Airbnb: Mainly short-term rentals are used with this investment strategy. Short-term rentals are rented out on a nightly basis for shorter periods of time starting from one night up to 6 months.
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How Much Will Property Taxes Be
Property taxes are taxes that homeowners pay to support their community and local government. Property taxes fund fire departments, public schools, libraries and other local projects. The amount you pay in property taxes is directly related to the value of your home. If your home is worth more money, you pay more, and vice versa.
Local governments set their own property tax rates, so the specific amount you pay in property taxes depends on your houses location. Speak with a local real estate agent or mortgage lender to calculate how much a certain house will require in property taxes. No estimate is going to be perfect because every homeowner qualifies for different levels of exemption as well.
What Is An Investment Property
Buying an investment property allows you to generate income through the renting or resale of a property that isn’t your primary residence.
Investment properties can be residential, such as single-family homes, townhouses or condominiums, or commercial properties, which are zoned for businesses such as hotels, restaurants and retail shops.
Investors in residential properties try to make money by collecting rent from tenants or by renovating the property and quickly reselling it for a profit, known as house flipping. The property can also be held long enough to increase in value over time, then sold.
Detached single-family homes are the most common type of residential investment property, according to the National Association of Realtors.
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Where Can I Find The Best Investment Loan Rates
Youll likely have a hard time comparing investment loan interest rates because lenders dont usually advertise their best rates.
However, weve published the best rates from our panel of over 50 lenders, so its easier for you to shop around.
You can check out these rates on the investment loan rates page.
Is It A Good Time For You To Buy Property
Assess your current financial situation to see if buying investment property makes sense for you now. A few questions to consider:
- Can you make a sizable purchase like real estate and still cover your existing financial obligations?
- Is your credit in good standing?
- Do you have the minimum 20% down payment youâll need to secure financing?
- Have you factored closing costs into your expenses?
- If any repairs are needed to a property before itâs rentable, do you have the money to pay for those repairs and the costs to carry the mortgage until youâre able to rent it?
- If you have a primary residence, could it be used as a potential financing source?
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How To Get A Mortgage For An Investment Property
A big question for people buying a property, whether its an investment property or a primary residence, is How much house can I afford? Start by looking at a mortgage calculator to get an idea of rates and monthly payments, and then you can get preapproved to see how much money you qualify for. Make sure that you tell your Home Loan Expert that youre interested in buying an investment property, which has different rules than a primary residence.
How Can I Buy An Investment Property With No Money Down
Generally speaking, you can expect sellers to ask for at least a 20% down payment on an investment property, as lower deposit options are usually only available for standard homebuyers.
But that doesnt mean that there arent ways in which you can purchase your dream investment home with no money down it just means that youll have to get a little creative with it and go off the beaten path!
Here are three of the most common ways to purchase an investment home without a down payment:
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Are You A Landlord
When you start buying investment properties, you need to take some time to think seriously about your ability to manage your properties. Its a tough job being a landlord tougher than most people think and Ive seen many an investor become overwhelmed by the time it takes to be a good landlord.
Fun fact: Be on the lookout out for this kind of investor. They sometimes burn out under the weight of their landlording duties and just sell their whole portfolio at once. Its usually a good time to swoop in and buy.
But the point is that not everyone is cut out to be a landlord. Its an intense and time-consuming line of work, especially if you already have a day job. For this reason, I highly recommend getting a management company to do this work for you.
Sure, youre probably spending 9% to 11% of the rent on this service, but they will take care of the tenants needs and collect the rent. And in the unfortunate event that a tenant needs to be evicted, theyll help handle that process, too. Time is often more important than money, and letting go of this stress gives you the freedom to pursue additional investments.
Are You Ready For Your First Investment Property
Making an investment in a house or apartment is a big decision but it just might be the right decision for you. With the value of real estate generally increasing over time while remaining less volatile than other investments, an investment like this could be enough to set you up for life. We recommend researching and finding out if this kind of investment is right for your future. Navigate the process with ease by speaking to one of our financial advisors today. With specialists in property as an investment strategy, our team will be able to help you prepare and find the right property to grow your wealth.
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