What To Consider Before Investing In The Real Estate Market
Investing in real estate specifically, buying a property with the hope that it can be sold later at a profit has a strong appeal for lots of investors. It seems like an understandable, accessible investment and a great way to turn a profit at a time when property values are rising dramatically. However, even with prices skyrocketing, real estate is an investment with risk.
Here are a few things to consider before you make a real estate investment:
Is now the right time?
Ultimately, investing in individual properties is a speculative endeavor a kind of high-risk investment that can result in outsized gains, or catastrophic losses. And while there are smart ways to make these investments, this is an incredibly risky time to be entering an already risky investment.
Its no secret that the housing market is hot right now. Its overheated, in fact. Recent data shows that home prices are setting records, particularly in highly populated areas like Washington, and inventories of available homes are at rock-bottom levels. It can be difficult to find a primary residence to own, much less to make an investment in.
Thats to say nothing of the usual risks and costs in real estate investing. Property maintenance is expensive, and tenants can be unruly. Taxes, insurance and laws pertaining to real estate can be complex. Any investor seeking a healthy profit margin will need to prepare for these potential challenges.
Us Population Growth Will Continue To Drive Demand
One of the main causes of an appreciating housing market is a growing population. When an area loses population and there are more homes than people to fill them, then the home values will fall.
For example, during its heyday in the 1950s, Detroits population exceeded 1.8 million. Today, Detroits population is less than half that, causing the areas home appreciation to trend far behind other major cities.
The U.S. net population is determined by three factors: birth rate, death rate, and immigration. If the population in America continues to grow, housing prices will also continue to rise. However, if the population decreases, like it did in Detroit, home values may likely fall.
Another reason why you should convince your clients to invest now to capitalize on the unique economic conditions of 2022.
Whats Ahead For Our Property Markets For 2022
Thats a common question people are asking now that our real estate markets are up and running again.
In my mind, were in for a 2-tier property market moving forward.
While most property markets around Australia have performed strongly so far this cycle , moving forward the rate of property price growth will slow and there are several reasons for this including:
- Affordability issues will constrain many buyers. The impetus of low-interest rates allowing borrowers to pay more has worked its way through the system and with property values being 20- 30% higher than at the beginning of this cycle at a time when wages growth has been moderate at best and minimal in real terms for most Australians, means that the average home buyer wont have more money in their pocket to pay more for their home.
- The pent-up demand is waning While there are always people wanting to move house and many delayed their plans over the last few years because of Covid, there are only so many buyers and sellers out there and there will be fewer looking to buy in 2022.
- is intent on slowing our markets using macroprudential controls
This will lead to a two-tier property market in other words, not all locations will continue growing strongly moving forward.
I can see properties located in the inner and middle-ring suburbs, particularly in gentrifying locations, significantly outperforming cheaper properties in the outer suburbs.
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Real Estate Investment: 5
For most people, the main reason behind buying real estate as an investment is to make profit. However, there can be instances where you might buy a property without considering all factors involved and without calculating the full cost. And when you do this, you may not get the returns you wanted, or worse, make a loss. The realty market is not at its best right now and this could add to your woes. So before you take this crucial call of investing in real estate, exercise these five checks.
Will I Owe Capital Gains Tax On A Real Estate Investment Property
Yes, depending on your income, you may owe capital gains tax on the sale of an investment property. Unlike a primary residence where you are exempt from capital gains up to a certain threshold, investment properties are not exempt from capital gains at any amount. If you turn a profit on the sale of your investment property after owning it for a year or more, youll owe long-term capital gains taxes at a rate of 0%, 15% or 20%, depending on your income and filing status.
|Income single filers|
|$488,851 or more||20%|
If youre filing under a different status, capital gains tax rates can be found here.
There are a few strategies you may try to minimize your capital gains on an investment property. If you choose to explore one of these options, always consult your tax professional.
Reason #: Interest Rates Remain Low
While the days of quick and easy mortgage loans are over, due to the housing market crash in 2008, interest rates still remain low . Your interest rate will depend on multiple factors: down payment amount, credit score and debt-to-income ratio. These factors will greatly impact which interest rate you qualify for.
Before Housing Legislation Turns For The Worst
Homeowners currently are allowed to deduct interest paid on as much as $750,000 of mortgage debt. The limit was $1 million. With Joe Biden as president, there should hopefully be more housing legislation relief going forward.
There may be a repeal of the SALT deduction limit, which would be a boon for homeowners in more expensive cities and states.
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Buying Rental Properties Is An Excellent Hedge Against Inflation
The downside of low interest rates is that they can be a driving factor in inflation, which can also be impacted by the government increasing the availability of money. Inflation is the devaluation of the dollar in comparison to the goods and services we buy. Generally, the more money thats injected into the markets, the higher the prices for goods and services.
The Cares Act and COVID-19 Relief Bill injected more than $4 trillion into the U.S. economy, causing concern about the devaluation of the dollar and an increase in inflation.
Many savvy investors know to reduce their cash savings by buying assets as a hedge against inflation. Rental real estate is an ideal asset that will not only protect against the lost value of the dollar, but will also provide income during slow economic times.
New Year New Investment But Where Should You Buy
If youre thinking of making a new buy-to-let investment this year, you may be wondering if there are any particular types of property or hotspots you should be considering locations where prices are predicted to rise quickly and where rental returns are well above average.
Of course, every investor would love great capital growth and high rental profits! However, we find thats pretty rare, and most landlords either do particularly well with just one of those or, more commonly, get well-balanced returns.
Although there may be a few locations where theres huge demand and a lack of supply for a particular type of rental, its important to take a long-term view with property investment. The reality is that no matter where you invest and what type of property you buy, the market naturally rises and falls over time.
So, rather than spending months hunting far and wide in search of todays best possible deal, wed say the key to success in buy-to-let is finding a good deal that will give you consistently decent returns over the long term.
And we can help you do just that!
Whether its your first rental property purchase or youre adding to an existing portfolio, here are our top tips for finding a solid investment this new year.
Invest close to where you live
There are several benefits to investing close to where you live:
Take advice from local letting experts
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Where Should I Buy An Investment Property In Perth
Willagee Average Rental Yield 3.73%
Real Estate Appreciates In Value
Real estate tends to appreciate in value over time.
Not only will the building or home itself likely grow in value, but the actual land that its built on will also usually be worth more over the years. In some markets, its not uncommon for the land to be worth more than the house that stands on it or for the land value to continue to rise even without a house on it.
Bernie and Marion, a couple from Northern Ohio, bought a piece of land for $10,000 in the 1980s, a lakefront lot in a small undeveloped community. They had intended to build on it and make it a summer home, but never did. Over the years, houses went up all around their lot, and the community grew. Now the lot still empty is worth right around $1 million. It will be part of their legacy to their children.
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Real Estate Has A High Tangible Asset Value
Tangible assets are physical things like property, computers, and equipment that are worth money. Real estate, especially, will always have some kind of monetary value.
Compare this to investing in stocks where, if the market crashes, it is possible that something you paid $500 for could suddenly be worth $0. With real estate land and real property your investment will always be worth something.
Americas Housing Supply & Demand
The direct cause of housing demand is the population growing from both natural increase and migration in a given area. Housing supply is the existing safe and functional housing in the area. Supply can only be increased by adding new housing or if demand decreases, making existing homes available.
When demand from both buyers and renters outpaces the supply , home prices and rents will rise. Lets see how these two factors are projected to behave.
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Beware Of High Interest Rates
The cost of borrowing money might be relatively cheap in 2021, but the interest rate on an investment property is generally higher than it is for a traditional mortgage. If you do decide to finance your purchase, you need a low mortgage payment that won’t eat into your monthly profits too much.
Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development .
If You Dont Buy Now You Cant Buy Later
If you dont own any property currently, it will be a lot harder to buy during a recession. Thats because lenders typically tighten criteria for lending during tough economic times will be more likely to lend to existing landlords with an excellent track record rather than someone new to the game. Thats not to say it will be impossible to buy, but you will be in a much better position as an existing landlord in good standing.
If you already own some property, owning more can potentially open yourself up to bigger deals down the road. The more you demonstrate that you are able to manage real estate and make repayments, the greater the potential for opportunity. Of course, the key is buying at the right price having property that you are unable to make payments on, or property that loses value substantially during a recession, will hurt rather than help.
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You Can Use Rental Income To Pay Down Your Mortgage
Rental income is an excellent way to pay down your mortgage. Renting out a room in your house to a roommate or even your entire house on Airbnb on weekends can provide you some extra cash that you can then put toward your mortgage. Profits from investment rental properties can help you pay down your mortgage sooner, or save for a down payment if you dont own a home of your own yet. Rental income is also a great source of passive income to add to your retirement plan. Youll have money coming in even after you retire from your job .
If youre going to use Airbnb to rent out your investment property, a room in an apartment or house that you rent, or even a portion of your own home, check the laws in your city for those kinds of rentals. In many major cities where rent prices are high, some Airbnbs can be illegal. Cities in the U.S. with strict Airbnb policies include New York City, San Francisco, and Santa Monica.
Reason #: Home Prices Will Continue To Rise
Its no secret that houses appreciate over time, but many people allow short-term fluctuations to prevent them from entering the market. Real estate professionals know the power of appreciation over an extended period of time, such as 20 to 30 years. This thinking is exactly what will allow you to attract more real estate investors and turn your current clients into investors.
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You Can Claim Depreciation As An Investor
Although real estate usually appreciates in value, the buildings themselves degrade over time, so investors can claim a depreciation non-cash expense on their taxes. The IRS considers residential rental property to have a useful life of 27.5 years. What this translates to number-wise is that you can divide your cost by 27.5 to figure out what your annual depreciation is. Commercial real estate has a depreciation of 39 years.
Make sure when youre figuring out your cost to subtract the cost or value of the land. Land doesnt normally depreciate only buildings do.
Should I Invest In Calgary Real Estate Part : Rental Property
Perhaps sparked by reality TV shows or by good-old fashioned advice about buying land , many clients start to consider a second property after they have bought their primary residence.
An investment property can range from a recreational cottage or condo to a piece of raw farmland to a bay in a strip mall, but Im going to focus on two more common examples today a single-family house and an apartment-condo that you rent out to residential tenants.
The first thing I will say is that real estate is almost NEVER a good short-term investment. Considering the costs and complications of selling real estate, I would recommend keeping any rental property at least five years.
Typically the longer you keep it, the better it is, since the market generally continues to increase and your mortgage continues to decrease.
Its important to remember that the biggest benefit of owning a rental property is using someone elses money at a low interest rate. If you have $50,000 burning a hole in your pocket, you could put that $50,000 into the financial markets but if you buy real estate with it instead, you can use it as a downpayment and buy a $250,000 asset. Good luck getting a bank to loan you $200,000 at a reasonable interest rate for you to play the stock market!
If your $50,000 financial investment increases by 10%, you have earned $5,000 but if the real estate market increases by 10%, you have earned $25,000.
Sale listing / Rental listing
Purchase price: $515,000
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Should I Buy A House Now
Its no secret that the housing market is hot right now. Still, that hasnt stopped homebuyers.
Despite rising home prices, low supply, and nearconstant bidding wars, Americans are buying homes in record numbers. According to the National Association of Realtors, more homes were bought in 2020 than any year since 2006.
Should you follow suit and buy that dream home now? Or does it make sense to wait until the market has cooled off? Lets dive in.
Foreign Investment In Us Real Estate
Foreign individuals and corporations are free to purchase residential or commercial real estate in the United States. In 2013, foreign buyers made up about 7% of transactions in the $1.2 trillion U.S. real estate market . The annual survey of the Association of Foreign Investors in Real Estate ranked San Francisco, which had been one of the top five global cities since 2011, at 11th place, and Washington, D.C., at 25th from 15th place last year. Furthermore, the survey revealed that New York City is no longer the only No. 1 city in the US that appeals to foreign investors that title is now shared with Los Angeles, which is tied with New York in this latest survey.
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