Are investment properties worth it?
There’s a big difference between owning your own home to live in and owning an investment property. An investment property is a real estate asset you use only for investment purposes. You must occupy a property for at least 14 days or 10% of all the days the property is rented to call it a residence. If you occupy it less, you’ll need to claim it as an investment property on your tax returns, according to the IRS.
An investment property is also not a fix and flip, which is when you buy a property, renovate it, and hope to sell it for a premium. These projects can be profitable. You hold them for a shorter time than you would an investment property. An investment property is held with the goal of receiving rental payments and long-term appreciation.
Take a look at why investment properties are a worthwhile venture and how you can get started.
Investment properties offer a host of unique benefits. They’re great sources of:
- Passive real estate investments: You’ll still have to put in the effort to find tenants and take care of any necessary repairs or renovations. But once everything is taken care of, you can sit back and count on a steady cash flow coming in every month. You’ll also have the benefit of capital appreciation when your property increases in value over time. These factors are what make investment properties appealing assets to own.
- Diversification: Investment properties are a great way to diversify your portfolio, particularly if you’re currently invested in stocks, bonds, ETFs, and more.
- Tax benefits: You need to report rental payments as income on your tax return. You also need to report capital gains to the IRS if you sell an investment property for more than the price you paid. That said, property owners are able to deduct various expenses from their tax returns. This includes mortgage interest, repair costs, physical wear and tear, and the cost of finding tenants. Make sure to consult with a tax professional for all the details.
Risks of Investment Properties
Every investment comes with a different degree of risk. Investment properties aren’t immune to this rule. To own a successful investment property, you’re going to have to prepare for the risks. These include:
- Lack of liquidity: Real estate is not the most liquid asset to invest in. In an emergency, you can sell stocks or bonds and receive cash in return pretty quickly. Real estate takes longer to sell. In some cases, properties can sit on the market for weeks or months. Be prepared for your investment to be “locked up.”
- Learning curve: The most successful investment properties are born out of years of expertise. It takes time to learn about the market and to find the best business model. Knowing how to spot an up-and-coming neighborhood, which maintenance tasks to outsource, and which contractor to trust can take a while to learn.
- Landlord responsibilities: Being a landlord requires extra effort. It can be time-consuming and even strenuous for some people. Landlords have to find tenants and screen them thoroughly. Some tenants may not pay rent on time or even harm your property. You’ll be responsible for any maintenance work tenants may need. While you can hire a property manager to help out with basic tasks, it will come at a cost. You’ll need to figure out the best way to maximize your time and expenses.
- Management fees: Some platforms can charge high management fees or other types of fees. It’s a good idea to have a chat with a platform advisor to ask questions before you invest. Be sure to ask about fees!
- Returns are not guaranteed: With any investment, there’s no way to know for sure when your investment will pay off and how impressive the returns will be. This is especially true for crowdfunding real estate investment platforms. Although many advertise average returns, these are never a guarantee for future returns. There’s a chance the platform’s investments could fail. Make sure you understand how your money will be protected even during a worst-case scenario.
When to Invest in Property
Investment properties used to have high barriers to entry. You needed to have a lot of capital on hand to enter the market. This isn’t the case anymore. Whether you’re a recent college graduate or a retired professional, you can take advantage of real estate investing now.
For all investment condos and homes on Marco Island, contact me at any time.Posted by Guy Amato on