LEARN ABOUT REAL ESTATE INVESTING
What should I do first if I want to consider the purchase of an investment property?
Read, learn, research, budget, and ask questions. Purchasing an investment property can provide significant long term benefits to you, but each property you consider will present a different set of risks and benefits. Just as I encourage my clients to go into the home buying and selling process with as much information and analysis as possible, before purchasing an investment property you must make sure you are fully familiar with the opportunities and challenges that will lie ahead. Some questions for you to consider as your contemplate your investment property purchase include:
- What price range of an investment property do you want to consider?
- How much of the purchase price will you finance?
- Will you manage the property yourself, or hire a property management company?
- Do you have cash reserves on hand to cover the costs of repairs as well as to cover gaps in rental income?
- What are your expectations for cash flow after all expenses are covered?
- Will you be considering student rental properties, or only properties geared towards non-students?
- Do you understand the tax implications of owning a rental property?
- How long do you plan to own the investment property?
These are questions that you can ponder on your own, or that we can meet to discuss together. I am here to serve as a resource for you as you consider the purchase of an investment property -- and there often are lots of conversations to be had before we even start to go looking at properties.
Are all properties and communities created equal?
No. Some properties will offer higher levels of positive cash flow in the short term, but will offer less certainty of increasing property values in the mid to long term. Some properties will always make it easy to find tenants - either based on location or market rental rates. Some communities are likely to allow you to keep tenants for multiple years, whereas other communities will likely guarantee that you will have more frequent turnover. Typically, I encourage investors to start by considering the price range for their purchase, and then we can discuss the pros and cons of different communities (and/or properties) that would be able to be purchased within that price range, and how a property in each community is likely to perform over time.
What are the specific financial benefits of owning an investment property?
The financial benefits of owning a rental property can best be understood within these four categories:
- Cash Flow: If your tenants pays you $1000 each month, and you have $850 of expenses (including the mortgage), then you will have $150/month of positive cash flow. This is an immediate, tangible benefit.
- Principal Reduction: Each month when you make a mortgage payment, a portion of that payment pays down the principal balance of the mortgage - and you are doing so with your tenant's money! Thus, if you have positive (or neutral) cash flow, you will be accumulating equity in your investment property thanks to your tenant's rent payments paying down your remaining balance on your mortgage. Thank you, tenants!
- Tax Savings: You must pay taxes on the income you generate with your investment property -- but you can deduct mortgage interest from that income, as well as property depreciation. As a result, many investors show a net loss on their investment property, allowing them to reduce the overall amount of taxes they pay by sheltering some portion of their ordinary income via this net loss due to ownership of the investment property. We can chat about this in generalities, and I am also happy to connect you with a talented tax advisor to help you further understand and analyze this potential benefit.
- Appreciation: As your property value goes up over time, you will be building further equity in your property. If you purchase five (5) properties valued at $100K, and they increase in value by 20% over a number of years, you have gained another $100K just by having owned those properties during that period of market appreciation.
What options will I have for financing my purchase of an investment property?
Depending on the financial institution you are working with (mortgage company vs. local bank vs. credit union) you will have a variety of options available to you. Most investors plan to put down a 20% down payment when purchasing an investment property -- this is a good rule of thumb, as it creates a buffer if you need to sell the property sooner than you expected, and with 80% of the purchase price financed, it is likely to create a scenario where you will have positive monthly cash flow. When you are ready to talk to a credit union, bank or mortgage company about financing options, let me know, as I have some specific lenders that I would recommend that you speak with.
How do I understand whether I am making a "good investment" with this purchase?
There is actually not a universal answer to this question. Whether the purchase of a specific property is a good investment is largely a function of the nature of your overall investment goals. Are you hoping to maximize immediate, monthly positive cash flow? Do you care less about monthly cash flow, and more about long term appreciation? How long do you plan to keep the property? Where do you place yourself on the risk/reward continuum? Depending on your answers to these questions, we can then start to analyze whether a particular property is a good investment for you. Of note, I have developed some tools
to help you analyze investment properties.
Certainly, there is more I need to understand about the purchase of an investment property, right?
Indeed! Oftentimes it can be most helpful for us to set up a time to meet and discuss your investment goals and I can then provide a variety of additional information and resources. Feel free to email me (scott@HarrisonburgHousingToday.com
) to set up a time to meet OR with additional questions that you might have. If you ask a good enough question, I might even post it on this website for other potential investors to learn from as well....just kidding -- all questions are good questions!
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