What is an Investment Property?
12 19 2016
Simply put, an investment property is real estate that's purchased with the intention of growing your wealth by either upgrading and reselling the property for more than the initial purchase price (known as "flipping" a property), or by earning a steady stream of income through rent payments made by tenants.
Align Your Investments to Your GoalsImagine yourself in a safe and stable retirement. What does that look like for you? How did you get there? What financial planning decisions and investments did you make to help turn your dream retirement into a reality?
As you create a strategy for the investments that will define your financial portfolio, always keep your goal in mind. Do you want to be able to pay off your mortgage, send your kids or grandkids to college, or simply have the money to live the life you want and deserve?
By aligning your investments to your goals (and not the other way around,) you can ensure that your investments work FOR you and help you get where you want to go.
And as you explore which options are right for you, you may want to look at an investment property.
Pros and Cons to Consider If an Investment Property is Right for You:PROS:
- They CAN be Lucrative: An investment property, if managed correctly, can provide significant and life-changing returns. Some house flippers have recorded six-figure gains from reselling the right property at the right time to the right buyers. Though an equal number of house flippers have recorded losses.
- Gain Equity: Imagine someone else paying off your mortgage. Sounds too-good-to-be-true, right? That's essentially what happens if you're able to fill tenant vacancies in a rental property and set the rent at a price that offsets your mortgage fees. This requires that your tenants remain in good standing and that you're able to fill vacancies quickly and efficiently.
- Earnings Reporting: While you're required to account for income you make from rentals as personal income, you can deduct any costs that are associated with the upkeep and maintenance of that property. Furthermore, the earnings from sales of real estate are recorded as a "capital gain" which is taxed at only 15% - far under the normal income tax bracket of many real estate investors.
- Flexibility: While the world of real estate income properties might be fast-paced, you generally have the freedom and flexibility to ensure that you are managing your property the way you want. For example, if your property is zoned for both commercial or residential usage, you can determine the most effective and beneficial resale or upgrading opportunities.
- Initial Investment: Investment properties often require a significant initial investment - a down payment, the acquisition of a new mortgage, or contractor and materials costs for upgrading in the case of a property flip. The size of this new financial undertaking can be prohibitive for many.
- Resale Risks: If you're interested in flipping a house, the largest profit generally comes with a quick sale of your upgraded property. But if the property sits on the market for months at a time, the monthly mortgage and tax payments can quickly add up.
- Lack of Tenants: If your plan is to rent your property to commercial or residential tenants, any months that your property sits vacant are months that you're on the hook for mortgage payments without any additional income to help offset the loss.
- Financing: Generally speaking, it's much more difficult to attain financing for an investment property than it is for your primary residence. Insurers generally won't provide mortgage insurance, which means that as a borrower, you'll need to provide at least 20% of the initial investment as the down payment.
- A Hands-On Investment: If you're flipping a property, it requires doing the legwork to make the necessary improvements to justify reselling your investment at a markup. If you're renting to tenants, you're required to maintain the property and meet livability standards. Both responsibilities can be outsourced to a contractor or management company, but this comes at a price which reduces your investment's growth potential.
Investment Properties offer Big Risk but with Big Return PotentialAn income property can be a big risk, but they can also deliver big returns if done right. Before you get started, it's important to know the real estate market you're entering as well as your tolerance for risk and your motivation for reward. After weighing the pros and cons of an investment property opportunity, you can truly make the decision that best suits your financial goals for the future.
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