Are you looking to gain great financial freedom by joining the world of real estate? You can try your luck by purchasing an investment property. The goal of purchasing an investment property is to earn a return. There are three different ways of earning a return from your investment property. To begin with, you can earn a rental income from your investment property. Moreover, you can sell your property in the future. However, you can use both methods to make money from your investment property. You can choose to make the investment short-term or long-term. Short-term investments mean that you will be purchasing an investment property, remodelling it, and selling it for profit in a short time. Besides, investment property also refers to other assets like art, securities, land, and collectables that you can purchase to make profits later. Here is everything you should know about investment property.
Explaining Investment Properties
To begin with, it is vital to understand that investment properties cannot be used for a primary house. The sole aim of investment properties is to earn an income. Investment properties earn an income through interests, rents, royalties, and dividends. Moreover, the value of the investment property will be determined by its use. Every investor should research to determine the property’s highest and best use. For instance, a real estate investor should weigh the pros and cons of purchasing an investment property in a specific area to determine if the property has a good income.
Biggest Types of Investment Properties
There are several types of investment properties. However, several investment properties fall into two categories. An investment property can either be a physical real estate investment like land or one that does not involve physical ownership like securities. Here are the biggest types of investment properties.
Residential properties allow investors to earn more income. Investors who focus on this type of investment property rents out the property to tenants at a fee. The residential investment includes single-family homes, townhomes, apartments, and condominiums.
Commercial Investment Property
Unlike residential investment properties, commercial investment properties are used for business purposes only. Although the maintenance cost for these kinds of properties can be high, the return on these kinds of investment properties is worth it. Most commercial investment properties are in the form of retail stores and commercially owned apartment buildings.
- Mixed Used
Mixed used investment properties generally refer to properties that can be used as commercial investment properties and residential investment property. For example, a building can have a retail store on the first two floors and have residential units on the top floors.
Top Tips on Investing in Property
You need to put some factors into consideration before you put your money on a brick and mortar investment. Below are some of the guidelines to follow before you buy an investment property.
Look at the overall financial picture
One of the important steps that you should take before you begin your journey to financial freedom is your budget. Begin by understanding your cash flow before you contact the bank for a pre-approval of the investment loan. Understanding your budget will allow you to settle on the ideal investment strategy. Also,
Choose the location
Once you have a clear insight into the financial picture, you should proceed to choose a location. The rule of thumb is to buy your investment property in an area that has huge potential. For instance, the rental property will be more attractive if it is close to transport, academic institutions, and social institutions.
Determine your investment goals
Property investments are either short-term or long-term. Ask yourself if you are patient enough to hold to the investment property long-term or if you are interested in short-term investment property.
Think about renovation and maintenance
You will need to renovate your investment property after some time. Therefore, you need to start thinking of ways to reduce renovation expenses. For instance, you can choose to get your hands dirty to save some money and increase the profit margins.
Focus on functionality
Another important thing that you should focus on is functionality and hygiene. A clean and functional investment property will earn a huge return.
Protect your investment
You should also protect your investment. The best way of doing that is by using homeowners’ insurance and property owner insurance. Purchasing insurance will protect your investment as well as other third parties.
Calculate the Return
It is also wise to calculate your returns. Factor in all the involved costs as you calculate your returns.
Understand real estate law
One of the biggest mistakes that you can make is to overlook real estate laws. You need to make yourself familiar with all the landlord-tenant laws in your state. For instance, you need to be aware of eviction rules, security deposits, and lease requirements to avoid trouble with the law.
How to finance investment properties
It is challenging to get a loan for investment property compared to other types of property. As a real estate investor, you will need at least a 20% down payment to secure bank financing. Moreover, real estate investors need a good credit score to secure bank financing.
The taxation process
Like any other investment, property investors are also required to report their incomes. For instance, a property investor who owns rental property should report the rent as income. However, the investor should subtract the expenses from the collected rental income. Property investors should report any capital gains to the regulating authorities.
Why Invest in Property
A property investor gets to enjoy several benefits. Below are some of the reasons why you should invest in property.
One of the reasons why you should invest in property is that you will enjoy a high return on investment. The interests are nothing compared to the profits.
Investing in property will also allow you to enjoy high appreciation. Regardless of the economy, an investment property will always appreciate after some time.
Several Tax Benefits
You stand to enjoy tax deductions. For instance, property investors enjoy interest, repairs, depreciation, insurance, and home office deductions.