If you’re thinking about investing in a rental property, experts say low home prices combined with low interest rates make this the best time in years to become a real-estate investor. While the timing may be right, these below articles can help first-time investors take advantage of what might be the opportunity of a lifetime.
- Investing in Northern VA Real Estate
- Investing in Real Estate? 6 Properties That Will Earn You the Most
- 5 Reasons to Tap Retirement Funds Now to Buy Rental Property
Investing in Northern VA Real Estate
Whether you are looking to buy your first investment property or your fifth this is a great time to expand your portfolio and invest in your future! Home prices are more affordable than they’ve been in years, interest rates are near historic lows and there are tons of great deals. All of these factors create a tremendous opportunity for you, the real estate investor! For those of you unfamiliar with the ins and outs of real estate investing we’re going to take a few minutes to give you a basic breakdown of how it works and why it is one of the best forms of investment you will ever make.
The first thing that we need to make clear when buying investment property is the obvious-it is an investment. This is not a home you will live in and, unlike buying your primary home, it is not a decision that is partially based upon emotion. If you do not separate your personal tastes, emotions and opinions from the investing process then you are far less likely to make money and might even run the risk of losing some. We can get into more detail later on how to analyze an investment property but just remember this is not an emotional decision. It is one based on facts and numbers.
Before you decide to buy an investment property we need to discuss the two main types of real estate investments: the ‘buy and hold’ and the ‘fix and flip.’ Both types can be very rewarding when done correctly but not every investor will be comfortable doing both. Let’s discuss both techniques and then you can decide which is a better fit for you.
Buy and Hold
Did you know that over 50% of millionaires made their fortune through real estate? And not everyone is a Donald Trump. Many millionaire investors are everyday people just like you that saw the opportunity real estate presents. Over time there is no other investment vehicle that can guarantee you as much of a return as buying and holding property as rentals. In fact, the government wants you to own property and they will help you do it! So let’s delve into the advantages of buying rental properties and see if it is a good fit for you.
In one word, what is the biggest benefit to buying real estate versus stocks and bonds? Leverage. If you buy $20,000 worth of stocks you have exactly that; $20,000 in stocks. That same amount invested in a property could buy you a $100,000 investment. Now let’s assume each investment had a 5% return over the course of a year. You just made $1,000 in the stock market, not too shabby. Guess what? You just gained $5,000 in equity for your property, that’s a 25% return on investment!
The next benefit to holding rentals is appreciation. Sure, both the stock market and the real estate market have ups and downs and both will go up over time, but real estate is much more predictable over a long period. Even if the stock market goes up, there is no guarantee that your specific stocks will increase in value. On the other hand, if you buy a home in an area with a strong local economy (such as Northern Virginia) and a high demand for housing, you know that the value will increase over time. Over the past 50 years the average annual appreciation of real estate nationwide has been 5% per year. Also, the amount you receive for rent will increase over time but your mortgage (assuming it’s fixed) will stay the same so you will actually net more money per month. If you hold onto property long enough to pay off that mortgage you will have some tremendous cash flow!
The last big reason to purchase rental property is that Uncle Sam wants you to! Indeed, one of the founding principles of this country was based upon homeownership. You get tax write-offs for interest paid, depreciation and even certain repairs or upgrades. The government wants people to own property and savvy investors have known this for years, taking advantage of all the incentives that are provided.
The one thing that scares off some would-be investors is the idea of being a landlord and being responsible for a tenant and any repairs. The good news is that not only can we help you find a great investment property, but we can manage it for you too! Let us handle the day to day operations and headaches while you focus on your life. You’ll be glad you did. Visit us at T&C Home Management to learn more about what we have to offer.
Fix and Flip
The process of finding a distressed property, fixing it up, and re-selling it is more commonly referred to as a fix and flip or flipping property. While rental properties are the key to long-term wealth, flipping properties can provide you with some fantastic short-term gains. Though there are advantages to this type of investing, it is not for everyone, so let’s discuss a bit further what is involved in the process.
Before we jump into the advantages of flipping properties we want to help you determine if this is something you should consider doing. First, this type of investing is much more time and labor intensive than holding rentals. If you cannot dedicate yourself to being on-site at least part of every day, you can’t keep an eye on contractors. Second, if you don’t know much about construction or home renovation, it might make it difficult to get a grasp on costs and a budget. This can be somewhat overcome by having a good contractor (we can give recommendations). But if you lose sight of your budget on a flip, then you can and will lose money. Lastly, you need to do a LOT of homework. When buying rentals you still need to analyze carefully, but you have more leeway for mistakes because it is a long-term investment. If you miss something with a flip you can lose your shirt in a matter of months. Luckily our team has agents that specialize in investment properties and can help guide you through the process.
So if you’re still reading…we assume you haven’t been scared off and are ready to hear about the great aspects of flipping properties and how it works. As a short-term investment you can make a great return fixing and flipping homes. Using leverage and doing your homework you can make double digit returns in a matter of months. As an investor you can also get some great deals on distressed properties, including foreclosures and short sales, which most homeowners are afraid to touch and banks don’t want to own. When flipping properties the cardinal rule you must always remember is that you make money when you buy not when you sell. This type of investing, even more so than holding rentals, is all about reducing risk and the way you do that is to know your numbers. Our investment property specialists are here to explain all the details and help you along the way in finding a home that will give you a great return.
So hopefully you can see how buying real estate investment properties can be profitable, no matter which path you decide to go down. We don’t have enough space on this page to describe all the details and intricacies of analyzing deals, but we would love to have the chance to sit down with you and go into more depth about the entire process to help determine what works best for you. So give us a call or use the contact form below; it’s never too early or late to begin investing in your future!
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Investing in Real Estate? 6 Properties That Will Earn You The Most
If you’re interested in improving your lot in life — no pun intended — by becoming a property mogul and investing your hard-earned capital into income-producing properties, there are some general guiding principles that should increase your chances of earning wealth.
One of the better ways to improve your wealth is to reduce your risk on the properties you purchase. This will allow you to buy lower-risk real estate, which hopefully will earn a fair amount of wealth for you over time. Go for these:
1. Properties in very good shape. Too many people buy fixer-uppers thinking they’ll add value by doing a renovation. Then they get mired in a much more expensive and time-consuming property than they ever expected. More money into the property means lower investment returns for you and less wealth-building than you expected. Skip fixers and instead buy properties that are in as good shape as possible, which should get those rental checks coming into your bank account in as short a period as possible.
2. Properties in moderately priced areas with good cash flows. Real estate is all about location, location, location! The properties in the best locations (think beach areas, downtown, wealthy enclaves) generally have very negative cash flows, so those are the location, location, locations you want to avoid. The moderately priced properties in working-class areas are the real gems; they generally have the boring locations, but much better cash flows. Of course pencil out any deal with conservative rents and expenses, and go for beginning year cash on cash return of at least 4 to 6 percent, based on your conservative estimates.
3. Communities with HOAs in good financial, legal, operational shape. There are many, many landmines in buying properties in common interest developments. And you aren’t just buying your property; you’re buying into a larger entity called the homeowners association (HOA). And if it is in financial, legal or operational trouble, you pay the bills. Make sure to do your due diligence on this — and it’s a lot of hard work to do it properly. Learn what you need to look at way before you go into escrow.
4. Properties that come with decent credit quality tenants in place. There is nothing better than buying a property with a decent tenant already in place. You get the security deposit and pro-rated rent, and you don’t have to go in and clean, paint, update or fix too many things in the unit. If you buy properties in areas that have decent credit quality tenants, that’s hopefully the type of tenant you will inherit. Also take a look at the current tenant’s lease, credit application and credit report, if you can, before you make the decision to purchase the property.
5. Properties in low vacancy areas. Vacant units get robbed, incur vandalism and don’t have any rent coming in to cover the bills. If you buy in places with really high vacancy, it might be months or years before you get the property rented out at a fair rental rate. So really think through buying properties in areas with many unoccupied units. Drive around at dinner time: No lights in a lot of neighborhood houses means no one is residing there, and you shouldn’t, either.
6. Properties you will own a long time. The most important factor in real estate investment property is to own it for a long time — in fact, forever is the optimal ownership horizon. So do your due diligence and buy quality properties that you really like for all the right reasons, and plan to own them for good. That’s your best bet to earn wealth on real estate.
If you buy properties with ALL the above characteristics, that will greatly increase the chances you will add wealth to your nest egg from your real estate ownership. So try to acquire properties that have as many of the above good qualities as possible, and skip the ones that don’t make the cut!
5 Reasons to Tap Retirement Funds Now to Buy Rental Property
SAN FRANCISCO (MarketWatch) — One of today’s soundest investments is never touted in financial-services ads. The reason: Wall Street wouldn’t make any money off it.
Since 1974, Americans have had the ability to use IRA assets to buy investment property. Yet the means to do that — called a self-directed IRA — remains one of the least known and unheralded investment vehicles in the vast financial marketplace.
With foreclosed homes selling at dimes on the dollar, residential real estate is a bargain for investors holding cash. And if they can put 30% down, IRA investors will find specialty lenders eager to help them leverage their retirement savings with mortgages on rental properties.
Bear in mind homes purchased with IRA funds can’t be used for personal purposes. Doing so risks the IRS declaring the assets withdrawn and demanding immediate payment of income taxes and penalties on the entire account value.
Still, as an investment readily understood by anyone who’s been through the home buying and selling process, purchasing a steeply discounted property that can produce annual income of 10% and more is a low-risk strategy for uncertain times — especially for retirees whose fixed-income investments are paying paltry yields right now.
Here are five reasons why buying real estate with an IRA is a potentially lucrative and wise move today:
1. A solid alternative to stocks
When economies teeter, investors often run to hard assets such as gold — humankind’s historic “store of value.” Yet gold’s value is measured not only in ounces but also in the intangible fear that surrounds its price spikes.
When it comes to hard assets, there’s perhaps no greater shared sense of value from Mongolia to Montana than for land and a dwelling. And in U.S. history, there’s never been such a fire sale on our housing stock.
The Great Depression exacted a heavy toll on home values, but there was nowhere near the inventory flooding the housing market as in the past year. The reason: A collapse in home prices, not stocks, triggered this meltdown.
Of course, some would say foreclosed-home buyers capitalize on others’ misfortune. But the sooner we clear the massive, nationwide inventory of unsold homes — which many economists argue is a key to recovery — the better off we’ll all be.
2. An investment well-suited for long-term investors
Even in the best of times, the stock market looks out six months to a year. Right now, even seasoned pros can’t feel the bottom of the muck we’re in.
Many retirement savers are uncomfortable with their nest egg tied up largely in stocks. That’s just the direction where the system of IRAs and 401(k)s — which also advances Wall Street’s interests — shepherds them.
Real-estate cycles generally run in decade-or-so swings and this one may not yet have neared its bottom. Housing values could drop another 10% to 20%, but the stock market also could drop further and take a decade to well surpass its previous highs.
Especially for those in or near retirement, buying a property that produces rental income that’s likely to increase with inflation is as sound a long-term investment as any TV commentator or investing guru might offer.
3. A steady income generator
At a time when companies are slashing stock dividends at record rates, retirees can’t be assured of that income source. And with government bonds paying a pittance in terms of yield, that fixed-income stream is running mighty shallow.
Income from a rental property bought with a self-directed IRA flows back into the retirement account. The IRA holds title to the property and the income it produces can be directed into all manner of investments typically held within an IRA, be it stocks, bonds, mutual funds or money market accounts.
On a percentage basis, that income can be two to three times higher than today’s fixed-income offerings even after paying expenses such as property taxes and insurance. Meanwhile, the accountholder can eventually reap the potential appreciation of the underlying asset — the property — that the IRA owns.
For retirement savers needing to fund a child’s college costs, a rental property held in an IRA also can be a valuable source of funds. While money taken out of a traditional IRA is subject to income taxes, it doesn’t face early-withdrawal penalties if used for higher-education costs. And while financial advisers caution against using retirement funds to pay for college costs, the IRA owner still has upside potential on the property to count on and the income in years ahead.
4. A safer means to play the stock market
For those who don’t want to abandon potential stock-market returns, a rental home owned in an IRA still affords them the ability to invest in stocks.
Rental income funneled into stocks or stock mutual funds today will be buying shares at sharply reduced prices. Directing the proceeds of each monthly rent check into stocks or mutual-fund shares accomplishes the same “dollar-cost averaging” strategy that occurs when employees steer a fixed amount of every paycheck into their 401(k).
Over a 10- to 20-year period, the return that the rental income produces if plowed into stocks is rich icing on the cake, coming on top of the return provided by the rental income itself.
5. The ability to flip real estate with no tax bite
Proceeds from selling an IRA-owned home roll back into the IRA without facing capital-gains taxes. To the contrary, an investor who buys and resells a property within a year with nonretirement funds faces a capital-gains levy.
Many foreclosed homes today are “distressed,” vandalized by angry departing owners who may have deferred maintenance due to tough times. They often ransack anything and everything not nailed down and many things that are, from lighting fixtures and kitchen appliances to furnaces and central-air conditioners, toilets and bathroom vanities.
Such properties — which can be found at most all price points — are among the cheapest on the market on a per-square-foot basis because the Federal Housing Administration (FHA) and most private mortgage lenders won’t loan on homes deemed “uninhabitable.” That drastically reduces the potential buyer pool to just cash purchasers — and reduces the property values as a result.
Even homes needing only cosmetic fixes sell at a discount today because there are countless others available in move-in condition. If an IRA home buyer has enough in the account post-purchase to refit a home’s interior — whether it’s laying carpet and laminate flooring or upgrading a kitchen or bathroom — going the minor-rehab route can be a rewarding approach.
Buyers might choose to fix up the cheapest, distressed property in a solid neighborhood so it qualifies for a mortgage and then resell it. They also could improve upon it over several years with the rental income. Either way, it’s a potentially enriching value-add strategy.
The bottom line with buying rental properties with an IRA is that the investor retains a level of control over a tangible asset that he or she could never remotely attain in owning shares of a company or a mutual fund.
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