Investing in Real Estate—5 Things to Consider
Deciding where to put investment dollars can be a challenge in today's ever-changing world economy. With the threat of turbulent markets, many are looking into real estate investment as a stable and profitable avenue for investment. Let's look at some key factors to consider if you plan to invest in the real estate market and be successful.
“Location, location, location” is what investors and home buyers hear when purchasing a property. Still, the purpose or the property or usage often determines if it is a smart investment decision.
If you run your own business and do much of your work from your home, purchasing a property that you can use for meetings, training, or retreats is an attractive option. The IRC 280a deduction allows homeowners to rent their residence to their business for 14 days each year. A property that serves as your primary residence provides more than just the standard home office deduction when tax time rolls around.
A home that serves your business needs is one investment purpose. But others exist as well. For example, consider buying a property to lease long-term. Also, buying property and selling it short-term for a quick turnaround on your investment or buying property and waiting to sell later, such as when you retire, are options that can be financially rewarding.
The Actual Property Value
Next, research the property's value. The value of the property determines financing options, taxation rates, and insurance premiums. Look for comparable sales in the immediate area—a beautiful home surrounded by properties of lesser value impacts appraisals and future sale price points. Also, consider future cash flow. Rent amounts may fluctuate as communities change or grow. And if the purchase is undeveloped or unimproved land, research the cost of construction.
After considering your investment purpose and the property's value you are interested in, look at future cash flow and the profit potential. Review and contemplate total rental income, increase in property value, and property depreciation for tax benefits.
Budget and Finance
Budget and financing are requisite components when researching and evaluating the feasibility and success of real estate investments. Knowing your spending capacity ultimately determines what can be purchased. Further, financing options for real estate are many. Talking with a loan officer before beginning your property search provides new buyers with vital information on the different types of loans, how a credit score impacts your loan and monthly payment, and if it's smart to pay points or not.
Your bank or lender can provide you with a great tool to have before making an offer on a property—a pre-approval letter. This document is provided by your bank or lender and states how much the lender is willing to let you borrow for your purchase. Obtaining this document requires submitting basic financial information and consenting to a credit report check. Offers that include a pre-approval letter are looked upon more favorably by the seller than those that do not have this document.
Location is Everything
Usage, income potential, future profit, and cash flow depend mainly on where you buy. As an investor, visibility and access to amenities that attract tenants or vacationers may be the priority, and a central location fits the bill. Properties within a central location are more expensive. Buyers may get less for the money, but the trade-off is a convenience for families or traffic for a business. These factors are critical when considering selling the property in the future. You may find that a property with a beautiful view may suit your needs. Properties in a rural setting provide more for the dollar but may lack in other areas. Ultimately, location impacts budget, purpose, income potential, and therefore, the final purchase decision.
Buying and building a property portfolio seems complicated for first-time real estate investors. However, a bit of planning and research on what you want a property for, property values in your area, the potential for future profit, loan options, and location leads to a successful and profitable venture. Do the research, do the planning and when a great deal becomes available, you will be ready.