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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Reason #: The Diversification Benefits Are Becoming Increasingly Valuable
Now more than ever, investors need to make sure that they are properly diversified.
Bonds and Treasuries yield close to nothing even as inflation is surging and stocks have become extremely volatile. For better or worse, REITs have also become increasingly volatile, which may turn off many investors.
Adding a rental property to your portfolio may help you diversify risks and sleep better at night knowing that you don’t have all your money at the risk of a stock market crash.
To be clear, it does not mean that a rental should be seen as a safe investment. But having some assets out of the stock market can reduce your portfolio risk during times of extreme uncertainty like today.
My Real Estate Investing Background
Ive been a multi-property owner in San Francisco, Lake Tahoe, and Honolulu since 2003. But I did sell one of my SF rental properties in 2017 because I didnt want to deal with being a landlord to a bunch of rowdy tenants. Besides, I was able to get $2.75 million, or 30X annual gross rent for the place so I took it.
I used the proceeds from the sale to reinvest $550,000 in real estate crowdfunding. I wanted to diversify across many real estate projects around the country that had lower valuations and higher cap rates.
My current property portfolio consists of three rental properties in San Francisco, one rental property in Honolulu, one vacation property in Lake Tahoe, and 18 real estate crowdfunding deals in the heartland.
Ive been writing about investing in real estate since I started Financial Samurai in 2009 where the site currently gets over 1 million visitors a month. I worked in investment banking from 1999 2012 and received my MBA from UC Berkeley in 2006. Property has been a core part of my passive income portfolio that allowed me to permanently retire in 2012.
As of 2021, my passive income portfolio is as follows:
Let met get into detail why I think buying real estate in 2021 is a good investment.
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Should I Invest In A Condo
Condos are often cheaper than comparable single-family homes, and they have fewer maintenance requirements. However, it can be more difficult to finance a condo, and you must consider the ongoing association dues and the potential for expensive special assessments. When considering a condo for an investment, be sure to investigate the financial health of the homeowners association and the current condition of the overall buildingnot just the individual unit.
Benefits Of Buying An Investment Property
An investment property can be a valuable asset and a good way to generate passive income, and it might also provide tax write-offs and incentives that you wouldnt get on other instruments, experts say.
We always recommend speaking to your qualified tax adviser on your particular situation, says Shtainer. However, generally speaking, there can be tax benefits to owning an investment property. This can be via the tax benefits that mortgages provide, as well as the IRS treatment of your investment/vacation home, depending on how you rent it out.
Anderson says that holding a property with the potential for appreciation and cash flow is a huge advantage of buying an investment property. It also diversifies your investment portfolio and protects your net worth while the market goes up and down.
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Why Is This The Worst Time To Buy A House
So why is 2022 such a bad time to buy a house?
As you can see by the chart we utilized earlier in this post, ever since 2020, the price of homes have skyrocketed.
Why is this? Why have the prices of homes gone up so much?
According to c|net, there are 6 reasons home prices have continued to jump:
Now, since the prices of homes is so high, it may just be the worst time to buy a house.
Is It A Bad Time To Buy A House In 2022
Would I go so far as to say that it is a bad time to buy a house in 2022?
If youre looking to buy a home because:
- You feel like if you dont now, youll never be able to afford one
- You want more space
- Your spouse says you both deserve it
- You think its just something youre supposed to do by the time you hit 30
But, youre not really ready for the payments, the maintenance, the insurance costs, and the unforeseen emergencies that come with itthen NO, you should not buy a house. And yes, 2022 is a terrible time to buy a house!
If, however, youre patient, you have the appropriate funds saved, and you want a house because you plan to enjoy it for 10+ years of your life, then who cares what year it is or what it costs compared to 1965. Just do it, make the reasonable payments, and live a lovely stress-free life in your new home.
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How To Successfully Buy Your First House In 2022
Is it the worst time to buy a house? Wellmaybe not the worst. But it certainly isnt the best time.
If you really want to buy your first house in 2022, I suggest you get a good realtor. Find one that has bought and sold hundreds of houses. They know the process and can help you not only find one, but can give you all the advice on how to put your bid in and close the deal in record time.
Dont go about this on your own. A seasoned realtor will be an invaluable asset to you. Interview them, find the best one, and then listen to their every word.
How To Determine Affordability
You dont have to be a millionaire to invest in property or a second home. To determine whether you are ready to buy, Clements recommends asking yourself two questions.
Are you cash-flow positive, and could you handle six months without receiving rent? If you cant answer yes to both of those questions, now is probably not the right time to buy an investment property, he says.
Shtainer says that buyers should be prudent, just as they would be with their primary residence. She advises that if youre not buying the property in cash and will need financing, you should make sure you get pre-approved.
Pre-approval will tell you how much the lender is willing to give you for the purchase of your second home.
Understanding your budget and sticking to it is very important, especially when making an investment, says Shtainer.
She says that buyers should do their due diligence to ascertain what they can afford, and she suggests they partner with a broker in their market to make sure they are purchasing a property at a favorable market value.
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What Is The Slowest Month For Real Estate Sales
So winter might be one of the worst times to sell a house, but what about the actual month? What is the slowest month for real estate sales?
See below for a chart of U.S. home sales by month over the last 10 years, provided by Trading Economics.
When you look at the data, its pretty evident that home sales rise in the spring and summer, and then typically drop in the fall and winter.
So which month is the absolute worst month if youre trying to sell your house?
According to many different sources, and its confirmed by the chart below, the absolute slowest month for real estate sales is December.
If you try to sell your house in December, plan on giving it away at a discount!
It Is Not Passive Income
We all dream of having multiple sources of passive income, but do vacation rentals qualify as a passive source of income? Vacation rentals can be a passive source of income, but you will have to pay a hefty commission for all the work that needs to be done by others. In general, you will have to pay for 3 things:
- Advertising and securing reservations
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Higher Atlanta Rents Invite Cash Flow
Rental values in Atlanta have gone up considerably in the last year or two. In fact, the rents in Atlanta are climbing at a faster pace than most other markets around the country. That positions you well as a landlord. Youll be collecting more every month if you invest now.
If you wait to buy a rental property when the market cools, you will find that rents might have stabilized, and you wont be able to leverage the rising rental values that currently exist.
Buy an investment that has good cash flow. Then, your capital appreciation is an extra bonus. Buy an investment property now, and it will almost certainly pay for itself. Then you can hold it as long as youre able to continue earning monthly income.
Its a challenge to find positive cash flow in a market thats stagnant. Invest now, and you can be sure youre going to get the highest possible rents, and youll be comfortable raising those rents at the end of the initial lease term.
How Do I Find A Real Estate Investing Partner
You don’t need a Wall Street connection to find a real estate investor with which to partner. Instead, you can ask your own network of family and friends, find a local real estate investment club, consider real estate crowdfunding, or search for social media groups that target real estate investors.
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Property Can Be Expensive
While rising property prices are good news for those who already own property, they can be prohibitive for new buyers.
The latest house price report from Rightmove in November 2021 found that the price of new properties coming to market are valued at £342,401 on average.
Although you can find property far cheaper than that, it can still be difficult to afford.
In our guide to how much money you need to invest in property, we found that youll need around £30k to afford a £100k property if you choose to get a buy to let mortgage.
If you dont have £30k available, you may struggle to find the right property for you and secure your own home. If you do have this money now, the answer to the question, should I invest in property now?, is yes, as prices are only going to get higher over the coming years.
You can learn more about minimising the costs of buying rental property further down this page.
How Do I Get Started With Buy
Your journey to becoming a landlord will typically involve five steps:
Step 1 Get your finances in order. Now is the time to speak to a financial adviser, to decide how much money you should be investing and the kind of returns you should be aiming for. Also speak to a mortgage broker to get the best deal so youre ready to make offers when you find the right property.
Step 2 Find your property and get your offer accepted. This might be quicker than buying a home, if the property is already rental but it might not be. Allow a good few months for the process.
Step 3 Take out insurance. Along with buildings insurance, youll want to protect against unexpected costs like injuries to tenants, damage and loss of rent.
Step 4 Find tenants. You can go through an agency or find your tenants privately. The right option for you depends on how involved you want to be. But remember: even if you hand-pick your own tenants and already know them well, draw up a legally binding contract. Friendships have ended over far less than a flat!
Step 5 Buy-to-let is a hands-on investment. Youll need to keep reviewing your mortgage when your current deal expires, and conduct any necessary maintenance on the property. You should also make sure that your income from buy-to-let is handled in the most tax-efficient way an accountant can help you do this.
Check out our guide to buying to let.
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What Are Some Good Alternatives To Buy
As an investment buy-to-let has much to offer: a regular source of income, plus a potential long-term yield from any increase in the propertys value. Against that, it is a high-maintenance investment, and your asset is locked away for a long time and hard to get at .
So depending on your investment goals, its worth considering whether any of the alternatives suit you better.
Residential Properties Purchased By Foreign Buyers In The United States
According to a report published in 2017 by NAR, Chinese buyers have been the top foreign buyers of U.S. residential property for three straight years, hitting a record high.
The below data has been taken from the report published by NAR .
For the new foreign real estate investors, it is important to know that in the United States, real estate listing information is shared by agents using multiple listing services, and consumers can access that same information using real estate sites such as Zillow. Each state in the US has its own set of rules regarding the purchase of the real estate, including the type of purchase contract used, the method of closing the sale, and even the duties and titles of the individuals involved.
Make the most of your investment dollars in 2021 by investing in real estate. Our analysis of the 20 best cities to invest in real estate was based on the most recent housing market trends, rate of appreciation, rent prices, job growth, economy dependencies, quality of life, etc. Please note that real estate prices are deeply cyclical because their demand side is impacted by economic cycles. Much of it is dependent on factors you cant control. A recent example is COVID-19 which has impacted our economy. Therefore, many variables can potentially impact the value of real estate and some of these variables are impossible to predict in advance.
References:
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Check Your Financial Situation And Ability To Make Payments
A big investment in real estate requires you to have a solid financial position. If youre owning to occupy, then youll want to ensure that youre able to make the payments, while landlords want enough cash to make repairs and cover a mortgage, if a tenant is unable to make rent.
Tuyo suggests its a good time to buy if you have job security and find a home you want.
However, even a temporary disruption to your income may not hold you back, says Franciosa. Lenders are aware of gaps in employment and want temporarily furloughed buyers to know it doesnt preclude them from qualifying for a mortgage, he says.
But given the uncertainties, those looking to invest in real estate can be more conservative in both how they finance a property and what kind of property they do buy.
The most important lesson potential investors can take away from the COVID-19 quarantine is to be more conservative with their use of leverage and to maintain higher cash reserves so they weather any sort of tenant default issues, says Gientke.
In uncertain times, Its good to stick with industries that fall within your circle of competence, says James Richman, CEO at JJ Richman, an asset manager. Its much easier to understand industries and areas that youve had exposure in as opposed to trying to decipher new and upcoming industries that you may not have exposure and expertise in the past, he says.
Ready To Invest These Are The Best Places To Buy Your First Rental Property
There are definitely pros and cons to investing in real estate right now. However, for someone who is in a good financial position, there are some clear and unique advantages of entering todays market. Just be sure to get your hands on a rental property in the right market.
Based on Mashvisors real estate data, here are some of the best markets to buy your first rental property. These are locations where landlords are currently enjoying a good return on investment, despite COVID-19.
#1. Muncie, IN
- Price per Square Foot: $85
- Price to Rent Ratio: 14
- Monthly Traditional Rental Income: $1,109
- Traditional Cap Rate: 5.4%
- Price per Square Foot: $120
- Price to Rent Ratio: 13
- Monthly Traditional Rental Income: $1,330
- Traditional Cap Rate: 5.3%
- Price per Square Foot: $134
- Price to Rent Ratio: 13
- Monthly Traditional Rental Income: $1,438
- Traditional Cap Rate: 5.1%
- Price per Square Foot: $105
- Price to Rent Ratio: 14
- Monthly Traditional Rental Income: $1,060
- Traditional Cap Rate: 4.8%
- Price per Square Foot: $166
- Price to Rent Ratio: 13
- Monthly Traditional Rental Income: $1,673
- Traditional Cap Rate: 4.8%
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