Investing in homes as investment properties is one of the best ways to build a dependable portfolio. However, take your time when selecting an appropriate property.
Before becoming a landlord, it’s important to assess if your personality matches. Some investors may find dealing with tenants, maintenance and contractors tedious; on the other hand, others might savor this experience.
Location of Investment Properties
Investment properties differ from homes purchased for family members in that they generate cash flow by renting out space. While this can be a lucrative business model, thorough research is necessary to maximize your returns on your investment.
One of the primary advantages to investing in a house for investment purposes is the chance to build equity, which can be used for paying down debt and expanding your portfolio over time. You may even qualify to deduct interest expenses from taxes.
The ideal investment property is a well-located, affordable house that increases in value over time. Investing in an area on the rise is also beneficial, but you need to do your due diligence before making a purchase. For best results, consult with professionals for guidance on location, numbers and potential pitfalls. A reliable real estate broker, accountant and financial adviser are essential for making the most of your money.
Rental Income from Investment Properties
Investing in residential properties to rent out is an excellent way to generate passive income. In addition to rental income, you’ll also enjoy tax benefits and appreciation of your property value.
However, you should make sure you purchase a quality property with positive cash flow. That means making sure the home has enough rental income monthly to cover expenses and your mortgage payments at today’s rates.
Calculating your cash flow can be done by estimating annual expenses. These should include taxes, insurance, maintenance and repair costs for property management and HOA fees as well as any other recurring fees you may face. Subtract rent from these costs to determine your net operating income.
Appreciation of Rental Homes
Appreciation is a term commonly used in real estate investment to describe how your property’s value increases over time. This could be due to factors like interest rates, inflation, schools, local job openings and home improvements.
Your local market conditions can also influence appreciation levels; from a seller’s market to a buyer’s market. As a result, values may differ significantly between communities.
As a general rule, the higher your appreciation rate, the better off you’ll be in the long run. However, there are some caveats to this calculation.
First, you’ll need to determine the average appreciation rate for a property. You can do this by reviewing sales data from past years.
Taxes
Real estate can be a rewarding investment, but it also carries significant tax liabilities. Therefore, it is essential for new investors to understand the primary ways their portfolios are taxed.
Before anything else, it’s essential to understand that capital gains taxes apply when you sell an investment property for more than you paid for it. The type of taxation due depends on how long you own the asset.
If you own the property for one year or less, your capital gains will be taxed at short-term rates. On the other hand, if you hold it longer than that, they are taxed at a lower long-term rate.
Depreciation is a tax deduction that allows investors to recoup the cost of buying and improving investment properties over time. It differs from other deductions in that depreciation is expensed throughout a property’s “useful life,” rather than taken at purchase. This can be especially advantageous for investors in low cap rate markets where depreciation could help offset some losses they will accrue. Always consultant a tax professional and expert for your situation vs taking any advice from anyone online.
If you are in the Phoenix, AZ metro area and want help with buying homes as investment properties contact Mark Brower Properties, LLC
