Real Estate Investment: Does it make sense for you?

Real Estate Investment: Does it make sense for you?

Real estate investment involves purchasing, owning, renting, or selling real estate to make a profit. There are several different ways to invest in real estate. But they all rely on similar economic factors to earn a profit. The first way to earn a profit is to make sure that the property turns a profit. Another way to turn a profit is that the cost of owning and maintaining the property should not be greater than the increase in the property’s value.   

There are several different types of investment property. A strategic investor chooses a property based on the kind of profit (quick or long term) that holds appeal to them. Quick turn investing means buying a property to turn around and sell it quickly; this is also often called “flipping.” Long-term investments are ones in which a property is purchased and rented or leased over a long period. This allows the owner to gain rent and the increasing value of the property over time.

Real estate investment versus investing in the stock market

There are several reasons to begin investing in real estate. Investors can enjoy a predictable cash flow, diversity, tax advantages, passive incomes, and leverage with a well-chosen investment. When investing, it is essential to note that there are advantages and disadvantages to both.

Advantages:

Real estate investment is easy enough to understand. While the homebuying journey can seem complicated, the steps are easy enough to understand. The basics are purchasing a property, managing the upkeep, and reselling the property for a higher value. The basics of real estate are much more straightforward than managing stocks. 

It is safer to invest in debt in real estate than in the stock market. Investing with debt is commonly known as your mortgage. You can invest in a property with a 20% down payment or less and finance the rest of the property’s total costs. Investing in stock markets is exceptionally tricky, and experienced traders are typically the ones who do it. 

When owning a property, there can be tax advantages. Homeowners may qualify for a tax deduction for mortgage interest paid on or up to the first $1 million in mortgage debt. There are also tax breaks when you sell a principal residence that will allow you to avoid capital gains taxes on net proceeds.

Disadvantages:

Real estate investments can require more work than stocks. Purchasing the property is easy to understand. However, maintaining the property requires a little more work compared to buying stock. Maintaining the upkeep of a home requires time and effort that is different from holding stock. 

The return on an investment is not guaranteed. While property prices rise over time, there is no guarantee that the property will not sell for less than what was purchased. The lack of certainty on a return is also true for stocks. 

What is important to consider when investing in real estate?

There are several relevant factors regarding real estate investment. One factor to consider is the property’s location. Proximity to amenities, parks or green spaces, neighborhood status, are all critical elements in the property valuation. When considering locations, it is pertinent to keep long-term goals in mind. Over time, people and companies will develop properties, and neighborhoods will change, so this is something that you should keep in mind when looking into investment properties. 

Another vital aspect of real estate investment is the valuation of the property. Property valuation is essential for financing during the purchase. In addition, it can also impact the listing price, investment analysis, insurance and taxation. Standard real estate valuation methods include the sales comparison approach, cost approach, an income approach. 

Leverage is also crucial to consider. Loans are essential when making a real estate purchase; however, they sometimes come at a high cost. It is beneficial to understand the dynamics of how to handle a loan to avoid high debt or over-leverage. Deciding on the mortgage that best fits you, taking notice of terms, conditions, and other charges levied by the mortgage lender, and hopping around for lower interest rates are all things you should consider while taking into account your current and future earnings.  

How can you tell if it’s a wise investment?

When making a real estate investment, there are several different ways to determine if it will be a good investment. One way to determine if it is a wise investment is to check for zoning issues and liens to see any complications with the property. Another way is to pay attention to the 1% rule, which states that the income property should rent for at least 1% of the purchase price to turn a profit. When investing in real estate, it is essential to let go of the HGTV hype. For most people, it is not feasible to buy the best fixer-upper but instead to purchase a home that makes the most sense for you. 

When determining if it is a good investment, it is always a good idea to look at the roofline and get a good sense of the property’s condition. If the property is not in the best of conditions, it might not be the wisest investment. Another way that can help determine if a property is a wise investment is by deciding if the price is less than 100 times monthly rent. Using 100 times the monthly rent overly simplifies the real estate process, but it provides a good baseline for determining if a property would be a good investment.

Is financing an investment property the same as financing a house?

When it comes to selecting how to finance an investment property, several options can be considered. There are many different investment loans for real estate, but these are just a few options to think about. 

One option includes considering a conventional bank loan. A conventional loan conforms to guidelines set by Fannie Mae or Freddie Mac which the federal government does not back. With traditional financing, the typical 20% down payment is paid when signing the loan. However, if it is an investment property, 30% of funds may be required as a down payment. Your credit score and history determine if you get approved for the loan as a way for borrowers to prove they can afford the monthly loan payments.

Another option when it comes to financing an investment property is to do a fix-and-flip loan. This is a type of short-term loan that allows the borrower to complete the renovations as quickly as possible so the property can be put back on the market. In a way, flip-and-fix loans are essentially hard money loans which means that the property you are flipping secures the loan. These loans might be easier to qualify for, but the drawback is a higher interest rate. 

A third option for securing financing for an investment property is tapping home equity. This can be done by drawing on your home equity through a home equity loan or cash-out refinance. In most cases, it is typical that the borrower might borrow up to 80% of the home’s equity value to purchase the second investment property. 

Should I hire a property manager to help manage my investment property?

Deciding to hire a property manager is a personal decision based on your specific circumstances and how involved you want to be in your investment property. There are many reasons to hire a property manager. There are also reasons that might convince you otherwise. Ultimately, hiring a property manager for your investment property is wholly dependent on what type of property owner you are. 

Property managers allow you the opportunity to avoid time-consuming tasks. They handle the day-to-day rental operations such as phone calls, tending to properties, and maintenance calls. Property managers will also list your property and find tenants to rent it.

While these are some advantages to a property manager, there are also some disadvantages. Property managers charge a monthly fixed rate based on a percentage of the rent. So, if you are not looking for another added expense on top of property investments, a property manager might not be someone you want. Another thing to keep in mind with a property manager is that you have less control over your property. If you prefer to be very hands-on, hiring a property manager might not be the best decision for you.

If you are considering property management services, feel free to reach out to Christy Jenkins with CJ&L Property Management. She would be happy to discuss our services with you and answer any questions you may have about the process.

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