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Investing

From Time.com/money

Should I Buy an Investment Property?

 

“You may be interested in buying an investment property if you want to diversify your holdings beyond stocks and bonds. While stories of quick flips—buying a home, renovating it, and reselling at a much higher price—dominate TV reality showsrenting is the true core of real estate investing. That’s because historically there has been very little real price appreciation in houses. Renting generates a steady monthly paycheck, like a classic dividend-paying utility stock. Any price appreciation is a bonus.

“But investing in a rental home isn’t like buying a low-cost index fund. Choosing the right property, maintaining it, dealing with tenants—all that takes work. Think hard about whether you’re prepared to put in the time. Can you handle after-hours calls? What if your tenant doesn’t pay rent?

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“Veteran real estate investor Leonard Baron says landlords ought to be handy and like fixing things. He also cautions people who are already juggling 60-hour jobs with kids to be wary. “Things may go well with your properties and you might not have too many issues, but that’s the exception, not the norm,” he says. Baron also suggests anyone considering getting into the rental business make sure they have enough savings to handle unexpected repairs early on, before the rent checks start coming in.

“Even though home prices have bounced back, deals can be found—if you’re careful. Underestimating the costs of renovation and ongoing maintenance, the biggest rookie mistake, can quickly tank your returns.

“Before you take the plunge, do your homework.”

Understand that there are 4 potential economic returns to investment property:

  1. Appreciation – In time, real estate markets gain value
  2. Depreciation – The IRS provides annual deductions from regular income
  3. Debt reduction – Tenants pay down the loan, increasing equity
  4. Cash flow – If it “pencils” the rent covers the mortgage, taxes and insurance

It is rare to gain all 4 benefits on a single investment, so consider what is most important to you. For example, properties likely to have the highest rate of appreciation will have the lowest possibility of cash flow without a higher than normal down payment. Cap Rates are used to estimate your return on investment – the higher the rate, the greater the cash flow. Gross Rent Multipliers are used to evaluate the quality of the property – the lower the rate, the better the deal, but a higher rate indicates a “pride of ownership” property.

Professional guidance is critical in providing perspective and options necessary to your success.

In real estate transactions, you don’t always get what you deserve…. But you always get what you negotiate. Put a strong negotiator on your side of the table – call Ron Garcia.

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