Investing in

Cape Coral & SW Florida

WHAT TO KNOW ABOUT BUYING INVESTMENT PROPERTY

Building a real estate portfolio can provide passive income opportunities but also comes with challenges. Investing should be done strategically. Real estate investments can be an attractive way of boosting your income. However, getting it right isn’t always easy. Like anything, it requires careful planning and serious consideration before you jump in. With that in mind, let’s look at the pros and cons of buying an investment property, as well as a few tips to help you make it work.

Investment property options

An investment property is any real estate purchase made to obtain a return on your investment. In most cases, real estate investors aim to make money by either reselling the property or renting it. Indeed, there are several types of real estate investment opportunities to consider, each offering a slightly different level of risk and reward.

House flipping

Flipping a house is one of the most common ways to invest in real estate for a reasonably quick return. House flippers purchase fixer-uppers for a relatively low price before renovating and fixing any major problems. Once it’s up to scratch, they’ll put the home back on the market for a much higher price. They’ll generally start the process again if they make a good enough profit.

Don’t be fooled by the TV shows, though – it’s not as easy as it sounds, and careful research, good connections in the construction industry and excellent DIY skills are a must.

Residential rentals

For a longer-term investment, you might consider purchasing a condo, apartment or single-family home to rent. This can provide a reliable income stream for many years for a relatively small amount of work. In fact, with turnkey units managed by a property management company, your income can be completely passive. As well as rent payments, you’ll also gain cash as the property appreciates in value.

Commercial rentals

Working in the same way as a residential rental, purchasing and renting a commercial unit to business owners can be a great way to diversify your portfolio and lead to even more significant gains. You’re not limited to who you choose to rent to either, as long as the space passes local regulations.

Benefits of buying an investment property

An investment property can bring numerous benefits as long as it’s properly planned and managed.

Potential to earn passive income

One of the major benefits of buying an investment property is that it can provide a passive stream of income. Most passive income is made by purchasing a property and renting it out. There’s typically some work involved at the beginning and between tenants, but otherwise, the cash will roll in for minimal extra effort.

Potential tax benefits

As a real estate investor, you could enjoy various tax benefits, such as deductions and tax breaks. Treat your investment as a business to get the most out of it. This lets you deduct expenses related to your investment property, such as contractors, materials and even mortgage interest. Be sure to discuss your investment with a tax advisor to see what local laws apply to you and which tax benefits you can enjoy.

Inflation is a fact of life, and while some assets depreciate as inflation rises, real estate prices typically rise with it. This offers an excellent level of protection against inflation and ensures your investment won’t become worthless as a result.

Possible increase in value

Real estate assets tend to appreciate over time, making them a relatively safe long-term investment. This is especially true in inner-city neighborhoods where space is at a premium, but it also applies to many suburbs. As the value of your property increases, you can turn that appreciation into hard cash, either by selling or refinancing. Of course, property prices can depreciate in some cases, so it’s important to thoroughly research the area in which you plan to buy.

Financing your investment property by yourself

Buying an investment property is just like buying a regular home. So, if you’ve got the funds for a decent down payment, you can take out a mortgage to cover the rest of the costs. This makes it a reasonably accessible investment. If you profit well on your first investment, you can soon start building up to larger projects.

It’s a flexible investment

You can often choose how involved you’ll be in your investment property. If you want to carry out all the renovations yourself, you can – often saving yourself a huge chunk of cash. Likewise, if you’re happy to find and manage tenants yourself, you can save costs there too.

On the other hand, if you’d rather take a back seat, you can hire contractors to carry out the renovations or a property management company to take care of cleaning and tenant issues. The choice is yours, and you can switch things up if your circumstances change.

Cautions when buying investment property

While plenty of benefits exist, an investment property can be challenging:

The initial investment can be high

Purchasing property is an expensive endeavor at the best of times. However, there are extra costs to consider when buying an investment property. If you already have a mortgage on your own home, you might find it challenging to obtain financing for an additional property. With enough equity, it is possible to refinance your mortgage and use the cash to put a down payment on an investment property. But then, there are other costs to consider, such as insurance and property taxes.

Furthermore, flipping a house will usually require a substantial budget for renovation works, especially if you’re hiring contractors. And even if you’re renting the property out, you’ll need to at least clean it. Then, you’ll need to find tenants, which involves marketing costs, legal fees and time. You could hire a property management company to help, but this will incur extra expenses, too.

There are also ongoing costs

With a long-term investment property, there will also be ongoing costs to factor in. Maintenance and end-of-tenancy cleaning fees will need to be taken care of. Then, you’ll need to replace your tenants, bearing in mind that the more time your property sits empty between tenants, the more cash you’re losing out on.

Finding the right tenant isn’t always easy

Renting out your property is a risk, and sadly, some tenants won’t treat your house with the same respect as you would. Accidental or intentional damage can occur, items can go missing, rent payments can be missed, or tenants might abandon the property altogether with no notice.

A solid rental agreement contract will help things, along with a decent security deposit, but even so, repairing damage and replacing items can take time, meaning it’ll take longer to get your property back on the market. Evicting a troublesome tenant can also take a while, so it’s worth spending time to find the right tenants.

Property prices can drop

While real estate tends to appreciate over time, there are occasions in which it decreases. It’s essential to research the local area and ensure the neighborhood isn’t declining. Look at future plans for the area that could see house prices drop, such as building a new highway or power plant.

It’s not a liquid asset

Selling property isn’t usually a quick process, so think again if you’re flipping a house and hoping for a fast profit. In the best case, it might take a month or so to sell your freshly renovated home, and even then, you’ll need to wait until the deal is fully closed before you can access your cash. In the worst case, finding a buyer can take much longer.

Buying an investment property can be a fantastic way to earn passive income, but it’s not something to rush into. Careful planning and thorough research are essential to success.

Buy – Remodel – Sell

Fixer-Upper, Home Renovation

HGTV and other shows have made flipping homes quite popular, and there appears to be some merit to it. Achieving success in flipping homes means understanding some key features of the practice. If you have questions about real estate investments then you should consider speaking with a Realtor or financial advisor.

Flipping houses will affect your cash flow, so planning ahead of time is crucial. Use our free mortgage calculator to estimate your monthly mortgage payment with taxes, fees and insurance. Consider hiring a contractor before you buy. Their fees may cut into profit margins when you’re tackling a home improvement project, but their professional evaluation of houses will likely save you money down the line.

Find a Suitable Real Estate Market

Even if you buy a reasonably priced home and stay within your renovation budget, that doesn’t mean you’re going to sell for a big profit. Be sure to do your due dilligence to home sales and house flipping profits in your location. Maybe you just need to venture an hour or so out of your zone to find a more profitable place to flip a house in. A professional Realtor can help you.

In addition, you should pay close attention to the neighborhood you invest in. What’s the income level and what’s the school district like? How about the crime rate? You can radically boost a dirt-cheap home, but it won’t sell as easily if it sits in a neighborhood with a recent spate of burglaries. Also, be wary of areas where homes are selling at a high rate. This could mean the local economy or neighborhood conditions are pushing people out.

Instead, you’re going to want to invest in places with high employment numbers, low crime rates and other signs that the neighborhood is thriving or quickly making its way up. Ultimately, you want to find an area that combines safety and economic growth with the potential for a profitable house flip.

A Guide to Flipping Houses for Profit

Once you have a sense of your target neighborhood and going prices for houses in it, it’s time to set up a house flipping budget. First, you need to know what you can reasonably pay for a new home. Buying with all cash is the simplest route for home flippers. It cuts out the mortgage application and approval process, as well as makes your offer more attractive to sellers. Plus, you won’t need to make ongoing interest payments for the property as the renovations are underway. Still, some house flippers need financing.

Once you nail down the amount you’ll need for the actual house, you should explore the costs of potential projects. Many people drop the ball here by failing to take the housing market into account.

For example, if neighborhood prices top out at, say, $300,000, and you pay $220,000 for the house alone, a $35,000 kitchen upgrade is going to eat into your net profit in a serious way. In this instance, you might want to limit the kitchen remodeling to $15,000. When calculating how much you think you can get for a house, aim for the lower end of comparable sales prices. This will give you more wiggle, should your renovations go over

Costs and Risks of Flipping Houses

You want to care that you don’t overextend yourself. Also, you don’t want to make the rookie mistake of thinking you’ll save money by doing a lot of the work yourself, so you spend more on materials. If you’ve never retiled a bathroom before, it may take you longer than a professional would take, and time is money when you’re paying interest for your financing. In the end, it may have been cheaper to hire a professional from the get-go, especially if you have to ask one to redo your work.

Of course, you can do light cosmetic upgrades like painting and stripping woodwork. But leave projects involving plumbing, electrical and structural changes to the professionals. That said, don’t just go for the cheapest labor. This is a big investment you’re making and you’re going to need the right talent. So make a thorough search for contractors and read online reviews. And ask your Realtor, friends and family for any recommendations.

You should factor in the size of the home as well. After all, a renovation on a large home will cost more than the same project in a smaller one by virtue of it requiring more materials. It’ll also take more time, which, as mentioned earlier, is valuable if you borrowed money for this investment.

Selling the Home You’re Flipping

If you don’t have a Realtor already, aim to interview a few. You want someone who can give you a thorough analysis of an after-repair value for the home. You also want someone with a great track record of selling properties in your area for top dollar. Finally, only sign on with someone you like and trust. To make sure you’re doing all you can to help sell the house, take a look at our guide on how to sell your house.

Flipping houses can be a lucrative business venture, if you do it right. To avoid issues, be sure to research different real estate markets and find a thriving neighborhood where you can find a low-cost home that you can reasonably sell for a profit. You should also stick to a budget and keep things small if you’re a beginner.

1031 exchange

Why choose 1031 Exchange

1031 provides investors with one of the best tax strategies for preserving the value of an investment portfolio.
By using an exchange the investor is able to defer the recognition of capital gain taxes that would otherwise be incurred on the sale of investment property.
The investor can then use the entire amount of the equity to purchase substantially more replacement property. To qualify as an exchange the relinquished and replacement properties must be qualified “like kind” properties and the transaction must be structured as an exchange.
Any type of real property can be exchanged provided both the relinquished property and the replacement property are held for productive use in a trade or business or for investment

Tax Benefits of Exchanges

Whethter the investor’s property is owned free and clear or encumbered, the benefits of a tax deferred exchange are signficant. The tax dollars saved by an exhange can be utilized to purchase additional investment property.
For example: the investor sells property with no debt for $1mio; basis is $500,000; the property has been held in excess of 12 month; capital gain is $500,000 ($100,000 from recapture of depreciation deductions and $400,000 from appreciation in value); current fed tax rate for an individual is 15% on appreciation and 25% on depreciation recapture (Corporations are taxed at a higher rate) investors state tax rate is 9% (federal deduction for state taxes is not included).
Result: The investor who exchanges is able to defer the capital gain tax an purchase replacement property worth $433,000 more than the investor who sells and reinvests with after-tax dollars

The exchange process

The exchanger must identify possible replacement property in writing within 45 day identification period.
The exchanger signs a contract to purchase the replacement property with the seller and the exchangers assigns the exchanger’s rights in the purchase contract to an qualified intermediary.
The exchanger has a max. of 180 days in the exchange period to acquire all replacement property.
At closing of the replacement property the qualified intermediary wired the exchange funds to complete the exchange.