What is Investing in Real Estate?
Investing in real estate means buying an investment property to generate profit. An investment property is immovable property which is not a primary or secondary residence. It is a piece of property that the proprietor will not occupy. The property is instead purchased to make a profit, either by rental income, a potential sale, or both. A home buyer may be interested in investing in real estate because of possible tax advantages or the ability to build up a portfolio of assets.
An investment property may be a long-term commitment or a short-term project, like “house flipping,” where a home is bought, restored, and then sold for a profit. Regardless of the particulars, real estate investors’ expectations are different from those of a traditional home buyer, so it’s important to partner with a lender who knows your goals.
Why Get a Loan for Investment Properties?
If a borrower is intending to buy a single-family home, townhouse, condominium, or multi-family residence, there are specific conditions for securing a loan on an investment property versus receiving a residential mortgage. The funding guidelines are different from conventional loans because investment assets naturally bear more risk – they also provide additional benefits:
- Rental opportunity: Leasing the property to tenants generates additional cash flow. Consider buying properties close to downtown areas, holiday spots or campuses as these are popular with renters.
- Increased cash flow: Income will be generated by your investment property to cover your expenses. You could also make the most of your rental house due to profit!
- Potential tax benefits: Owning rental properties can have many tax advantages, such as mortgage interest deductions, property and real estate taxes. Be sure to find a tax adviser.
- Develop your investment portfolio: Owning an investment property will diversify your portfolio.
Real Estate Investing: Types of Properties
If you are considering investment in real estate and a loan for investment property, here are a few different forms of property and the pros and cons for buying and keeping these:
Vacation Investment Property
- Beach or ski rentals will produce a month’s long-term rent in a week
- Holiday rentals can be supplemental and only a few nights a month will add up to the mortgage covered
- You can use it if you want to
- Popular areas can cost you a lot
- Often turnover means you must be an active landlord
- More tenants raise the risk of damage
- Can sit idle off season
College Investment Property
- Usually a demand exists
- High rents because competition from other college-owned properties charges top dollars
- The rental market is calculated with the share of each individual tenant compared to the rates of the dorm or college-owned apartments (as opposed to one for the whole property)
- The region markets itself
- If you buy where your children intend to attend school, you can have property do double duty
- Rent short term for orientation, summer school, sports events, etc. during the summer or off season
- Frequent turnover; regular leases of 8-9 months
- Risk of damage, noise complaints, repairs, disputes with tenants
- “Off season” can result in vacancies but high rents should be compensated for throughout the year
Long-term Investment Property
- Stable tenants, often for years, let you know who cares about your home and builds equity
- Low turnover can help you anticipate repairs (tenants have proven that they will not damage property, but they will still need regular maintenance)
- It can be a “passive investment.” It can handle all leasing, tenant interactions, and repairs if management company is used
- Track demand and sell when it’s best to do so
- Monthly rent would not be as high as holiday rentals or college rentals
- It’s a good business practice that rentals will cover the mortgage, maintenance and other expenses like HOA for long term tenants. A landlord who does not maintain property or increase rents at any opportunity in the area will gain a bad reputation.
Investing in Real Estate & Taxes
With multiple income sources and assets, your taxes can get a lot more complicated. Here are some of the tax consequences you might expect when you make an investment in real estate.
Note: Capital Gains Tax and Short Term Capital Gains Tax is applied on selling of rental properties. Borrowers should always seek tax advice from a financial adviser or tax accountant.
Capital Gains Tax: If you have owned it for at least one year, you will be obliged to pay capital gains on your investment property. You can exclude the money charged in land transaction fees, but the revenue you receive from selling your land is still taxable based on the tax bracket you’re in for the rest of your revenue
Short-Term Capital Gains Tax: If you haven’t owned your property for at least one year, you’ll still be taxable on short-term capital gains. At least these taxes are easier to calculate — the gains from your investment properties are actually considered a part of your taxable income.
Rental Revenue Taxes: Revenue from a rental property must be declared in the tax report. Around the same time, because you own the land, you can exclude those costs, such as repairs and maintenance (although not improvements).
Moving into the world of real estate investment is always a great opportunity. The returns can be significant and the experience, satisfying.
Tips on Investment Property Loans
Ready to take the step and borrow towards investing in real estate? Here’s some advice:
Have money for a large down payment — you’ll need to put down at least 15 percent to get traditional financing on such a property, and mortgage insurance is not applicable. You can also qualify for an even higher interest rate with 25 percent down.
Check your credit score — you could end up paying more for the same rate of interest if your score is below 740 or you have to accept a higher interest rate. Often, lenders may like to see you have at least six months of personal and investment-related expenses.
You have options — consider a bank like New American Funding providing funding for your investment property loan instead of a major bank if you don’t have as major a down payment as you would like. Mortgage banks such as New American Funding can have access to a broader variety of loan items.
Get creative — ready to pull the trigger on an investment property with a high probability of making a return to you? Using other ways to secure a down payment like a home equity line of credit, or life insurance policies.