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What You Need to Know About Buying an Investment Property

by Point2 Editorial Staff
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7 min. read

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. If you get it wrong, you could soon face severe financial difficulties or even bankruptcy.

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.

What Exactly Is an Investment Property?

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 out. Indeed, there are several types of real estate investment opportunities to consider, each offering a slightly different level of risk and reward.

1. 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.

2. Residential Rentals

For a longer-term investment, you might consider purchasing a condo, apartment or single-family home to rent out. 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.

3. Commercial Rentals

Working in the same way as a residential rental, purchasing and renting out 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.

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The Benefits of Buying an Investment Property

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

1. 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.

2.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.

3. Inflation Protection

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.

4. Your Investment Property Can 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.

investment property concept

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5. You’ll likely Be Able to Finance 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.

6. 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.

The Dangers of Buying an Investment Property

While plenty of benefits exist, an investment property can quickly become a slippery slope into financial difficulty.

1. 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.

2. There Are Also Ongoing Costs to Think About

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.

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3. 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.

4. 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.

5. 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.

Not only does that mean your cash is tied up, but you may also be losing money all the time that it’s not on the market.

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.

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