Investment Property - Profits and Pitfalls
Posted on April 25, 2015
While interest rates are still low, buying an investment property might be tempting.
Let’s face it: earning revenue is always attractive, so rental or resale income can be enticing. Making the investment into property is a big decision, though, and it carries some potential risks.
Types of Investment Property
First, let’s talk about what qualifies as an investment property. In short, it’s any land or buildings you buy with the intention of selling for a profit or managing for rental income. This can include:
- a single home you flip or rent
- an apartment building
- a commercial building
- land you rent, such as for agricultural use
The Upsides
Regardless of the type of investment property, the goal is profit. However, how and when that profit is achieved can vary. If you’re flipping a house, of course, it’s a fairly simple proposition: ideally you sell the house for more than you paid, plus the cost of the work you put into improvements, plus the realtor fees, plus your profit margin. If you’ve bought well and kept your improvement costs low, you’ll likely earn higher profit.
If you’ve bought a property to rent, whether residential or commercial, you’ll be looking to receive monthly fees. You may want to look for some profit here, charging more in rent than your mortgage payment plus insurance and other fees. However, especially if the market is competitive, you may want to just cover your monthly costs until the mortgage is paid off, at which point you’ll be looking at pure profit. Of course, you can only charge what the market will bear, which will undoubtedly impact your monthly income.
The Downsides
First off, you’re responsible for paying the mortgage and any other costs, including insurance, taxes and HOA fees, on any commercial property you own, regardless of whether it’s rented. This can be a significant financial risk – your other financial resources may need to carry the property if you don’t have a tenant. There are tax advantages to owning rental property, but you do owe tax on the income.
You’re also responsible for maintaining the property. If the furnace goes out in a rental home, you’re the one who needs to get it fixed or replaced. If there’s a hail storm and the roof is damaged, you’ll need to deal with the insurance company (if your insurance covers this type of damage) and the repair team.
Most importantly for an investment property you plan to keep for rental, you need to find and keep good tenants. Not only do you want the property full so you earn the monthly rent, you want tenants who won’t unduly damage the property, who pay on time and who will stay long-term so you don’t have the hassle of finding new tenants and have to manage the income gap that can come between renters.
Seek Professional Advice
Regardless of which approach you choose, purchasing commercial property is an important decision with far-reaching financial and personal implications. Before moving forward, work with a financial professional with investment property experience, talk with an accountant to discuss tax implications for your specific situation, and always research carefully before making any purchase.
Photo by Stuart Miles via freedownload.net