In this guide, we'll show you how to find a property to invest in that will suit your needs and help you make a profit. We'll cover the basics of investment properties, including what to look for and how to assess their potential. With our advice, you'll be able to confidently find an investment property that's right for you.
What is an investment property?
An investment property is a piece of real estate that is not your primary residence. You can purchase an investment property to generate rental income or for the purpose of selling it at a profit later. There are many types of investment properties, each with its own set of risks and rewards. Here are some of the most common:
- Residential property - This includes single-family homes, duplexes, triplexes, and quadplexes. These can be rented out to tenants or used as vacation rentals.
- Commercial property - This includes office buildings, retail stores, warehouses, and industrial buildings. These are usually leased to businesses.
- Agricultural property - This includes farms, ranches, and other land used for agricultural purposes. These can be leased to farmers or used for personal use.
- Recreational property - This includes campgrounds, RV parks, cabins, and timeshares. These are usually used for personal enjoyment or leased to others for their use.
- Development property - This includes vacant land, raw land, and land with improvements such as roads and utilities. These are usually purchased with the intention of developing them into something else.
As discussed above, each type of investment property comes with its own set of risks and rewards. Residential properties, for example, tend to be less risky than commercial properties, but they also tend to have lower returns. Agricultural properties can be very risky, but they also have the potential for high returns. Development properties are generally the riskiest, but they also offer the greatest potential for profit.
What to look for in an investment property
When you're looking for an investment property, there are a few key factors to keep in mind. These include:
Location
The location of your investment property is important for a number of reasons. First, it will affect the value of the property and how easy it is to sell in the future. Second, it will impact the rental potential of the property. Properties in desirable locations are more likely to be in high demand from tenants, which can help you keep your rental vacancy rate low.
Price
The price of an investment property is obviously a major consideration. You'll want to find a property that is priced below market value so that you can make a profit when you sell. However, be careful not to overpay for a property just because it's cheap. Make sure to do your research and know the true market value of the property before making an offer.
Rental potential
If you're planning on renting out your investment property, then you'll need to make sure it has good rental potential. Look for properties in areas with high demand from renters, such as near universities or in popular neighbourhoods. Properties with features that are in high demand, such as multiple bedrooms or private outdoor space, will also be more likely to attract tenants.
Maintenance costs
It's important to factor in the cost of maintaining your investment property when you're assessing its potential profitability. Things like monthly utility bills, regular cleaning, and occasional repairs can all add up. Be sure to include these costs in your calculations to get an accurate picture of your expected return on investment.
How to assess the potential of an investment property
Once you've found a few properties that meet your criteria, it's time to assess their potential. Here are a few things to look at when evaluating an investment property:
The rental market
Research the local rental market to see what kind of prices properties are renting for. This will give you an idea of how much income you can expect to generate from your investment property.
The sales market
It's also a good idea to research the local sales market. This will give you an idea of how easy it will be to sell your investment property in the future and how much profit you can expect to make.
The economy
The state of the local economy can impact both the rental market and the sales market. If the economy is booming, then there will likely be high demand for both rentals and sales. However, if the economy is struggling, then demand may be lower.
The neighbourhood
Take some time to get to know the neighbourhood where your investment property is located. This will give you a better idea of the type of tenants that are likely to be interested in renting there. It can also help you assess the long-term potential for the area.
Conclusion
Once you've done your research, you should have a good idea of whether or not an investment property is a good fit for you. With our advice, you'll be able to confidently find an investment property that's right for you.
While these factors add up from the investors’ viewpoint, the final success story involves additional characters. It was easier to gauge the success or failure rate until the COVID-19 pandemic crushed the entire world, impacting not only animate humans but also inanimate things like real estate.
If you are considering a property investment, it is crucial to consider the pandemic’s impact. The global outbreak has compelled many people to rethink how long they can stay in their present homes before having to relocate to a new and safe location.
In communities where a large number of people were infected, many individuals are considering selling their houses as a preferred option so that they do not miss out on the early profits or lack of demand down the road.
Moreover, strict norms to curb the spread of the virus have made it difficult for both property sellers and buyers to engage in frictionless transactions. Immediate repercussions include shockingly declined property sales, an abrupt increase in cost and people abandoning their properties in the metro cities, throwing the market into a depressing state.
Currently, the real estate market is in a volatile state and witnessing change on different levels. With the abrupt change in policies of governments, the real estate market is in flux, which affects its stability. Owning a property is getting more challenging for people due to the rising interest rates on mortgages.
Still, people are looking for ways to make money with property investment. If you are one of them, then the following tips will help you create the right mindset and plan.
Select The Right Location
Selecting the right location for your next property is half the battle won. The location should cater to everyday needs by being close to grocery stores, restaurants, cafes and public transport.
By choosing the right location, you kill two birds with one stone, i.e., better resale value and higher rental income. Right location means having all the amenities nearby, which allows you to quickly sell your property once you decide to move on – best if you have a money-making mindset.
Moreover, the value of property bought in the right location and at the right time will rise over the years due to appreciation and capital growth. The demand will also grow because of new development projects like residential buildings or shopping centres being built nearby.
Get Proper Insurance
Getting the proper insurance is essential when you consider investing in a property. Insurance should not just be for your home. It is equally feasible for your next property. But the question arises - why is insurance crucial for your property?
There is a multitude of reasons for having your property insured. Without proper insurance, it will be next to impossible to get compensation for mishaps like a fire or burglary. It is safe to say you will have to bear the burden of any untoward events alone.
Also, it is recommended for landlords to get insurance by paying a small subscription fee to an insurance company today and get a guarantee in exchange. It comes in handy if you are planning to rent out your property to tenants. Insurance companies will be responsible for bearing any large and uncertain loss that may happen due to mishaps caused by tenants.
Define Your Investment Goals
Understanding your investment goals is the next big step in your path toward making a profit from your property. Defining these goals is not easy. You need to be realistic and measure your goals in the long term.
That means if you are looking for at least 20% appreciation per year, which might not be very realistic considering the property location and current circumstances, then you need to be more practical in your approach.
Also, you should stick to a time-bound strategy when it comes to investment goals. It would mean forging a strategy that includes both buying a property and selling it at the right time, allowing you to attain your investment goals more quickly and efficiently. This way, you will likely save yourself risks that might occur during your ownership period.
Lastly, you should be more specific in your investment goals, which enables you to clearly navigate your property investment journey and fulfil your goals without any fuss or additional cost. If you are clear and realistic in your investment goals, then there are good reasons to invest in property right away.
Analyse Financing Options
Analysing the available financing options will place you in a better position wherein you can better understand and anticipate the overall interest and other crucial factors. It requires extensive research on your part, so that you know the current interest rates and check their feasibility.
Checking your credit score is an essential part of this step. That is because lenders are likely to prefer individuals with satisfactory credit scores. But what if your score is not up to the mark?
Fret not. If that is the case, you should be quick to implement the steps and improve your score, which will save you during the tedious approval or pre-approval process.
Another financing option could be a home equity loan, wherein you can secure an investment property. This option usually offers around 80% of the home’s equity value, which you can use to buy your next dream property.
Consider Long-Term Expenses
Considering long-term expenses is the next step if you are looking to accrue some financial benefits from your investment. Carefully think through the different expenses that aren’t included in the initial purchase price. These expenses include maintenance and renovation, property taxes, annual insurance charges and more.
To get an estimate of these expenses, you need to analyse the previous bills and communicate with homeowners who have been living in the neighbourhood.
Hence, it becomes all the more important to keep in mind these long-term expenses before plunging into a seemingly optimistic property investment market. That means analysing whether you will get a higher monthly rent or mortgage than the monthly cost of maintenance and repairs.
By taking into account all these factors, you can make a more informed decision that will not only be right for your investment needs but will also give you fewer headaches down the line.
Conclusion
Investing in a property can be a lucrative option once you keep these tips in mind and make your decision based on all the factors listed above. In the post-pandemic world, the outlook of property investment is gradually becoming promising, making it great even for beginner investors.
For those looking to buy property as an investment, make sure you do not put all eggs in one basket, meaning do not invest every penny in your next dream property. It might prove dangerous if your property fails to give you the desired rental income, which happens in many cases. So, place your mindset in the correct order and stay in the game for the long term to survive and win in the end.
1031 Exchanges Must Be Like-Kind
Section 1031 of the Internal Revenue Code specifies that no gain or loss shall be recognised on the exchange of one piece of investment real estate for another, as long as they are of like kind. That doesn’t mean that you have to trade your apartment building for another – it just means that you have to trade it for another investment property.
You Need An Intermediary
In order to perform a 1031 exchange, you need to find a qualified intermediary. The qualified intermediary will hold the proceeds from the sale of the first property on your behalf, and use it to buy the property you’re swapping for. Because the intermediary handles your money, you can’t be said to have received any proceeds on the sale of your initial property.
There Are Some Important Deadlines
Sometimes, you can perform a 1031 exchange if you happen to find someone with a property you want who wants your property. In that case, the sale of your old property and the purchase of your new one can take place at the same time. But you’ll usually need some time after the sale of your initial property to find another property to invest in. In that case, you can do what’s called a delayed 1031 exchange, and buy your replacement property some weeks or months after you’ve sold your initial property. You can even do what’s called a reverse 1031 exchange, in which you buy the replacement property first and then sell your original property.
If you’re doing a delayed 1031 exchange – which is the most common type – you’ll have 45 days from the sale of your initial property to designate some properties you’re interested in buying. You should designate the replacement properties in writing to your intermediary. Once you’ve designed your three properties, you‘ll have 180 days to close on a replacement property.
You Can Do As Many 1031 Exchanges As You Want
As long as you do your 1031 exchanges correctly, you can do as many of them as you want. You can roll the capital gain on your initial property over into a new property, and then sell that property and roll those capital gains into a new property, over and over for as long as you want. Eventually, if you do sell a property outright, you’ll have to pay long-term capital gains taxes, but you can defer paying capital gains tax for years and have that much more capital for your property investments.
1031 Exchanges Can Help With Estate Planning
You can only use 1031 exchanges to defer capital gains, not to avoid them – with one exception. If you die without ever selling your replacement property, your heirs will inherit it at its current market value, and they won’t have to pay capital gains taxes on the appreciation in the value of the property.
You Can Only Exchange Investment Properties
Prior to 2004, when the tax code was changed, you could use 1031 exchanges to swap one holiday home for another, and even turn that home into a primary residence while still delaying the recognition of any capital gains on the property. You can’t do that anymore – now you can only buy a holiday home through a 1031 exchange if you’re renting it out for income. If you want to swap your current holiday home for another property using a 1031 exchange, you’re going to have to rent it out for six months or a year to convert it into a rental property.
Conversely, if you want to move into a property you bought in a 1031 exchange, you need to wait at least two years, during which you rent the dwelling at market rate for at least 14 days each year, and during which your personal use of the property can’t 10% of the number of days each year that the property is rented, or 14 days, whichever number is greater.
1031 exchanges can be a great way to save on capital gains taxes, especially if you want to pass the investment property down to your heirs. With a little advance planning, you can use 1031 exchanges to significantly increase your real estate holdings and personal wealth.
