What Is the Definition of an Investment Property & How Can You Profit?
While every real estate purchase is an investment, there is a big difference between purchasing property for personal use and strictly for investment purposes. The intention of an investment property is to earn a return on the investment through selling the property in the future, renting the property out, or both. Another key factor is that you do not reside on the property as your primary residence. If you are considering investing in your first rental property, here are a few things you should know.
Value Is Based on Use
The way you use your property has significant impact on value. Each property is unique as to the best and most profitable way it can be used, which means that doing your research is vital. If the property is zoned for either residential or commercial use, it’s important to weigh the pros and cons to find the best way to use the property and what will have the highest rate of return.
Do Your Homework
Check out investment books, take courses, and consult with real estate agents on the best way to select locations and evaluate the market. One of the best places to start is in your own neighborhood where you are familiar with the local economy, the demographic of residents, and can better ascertain whether things look positive for the future.
Verify all of your costs; one of the most important is the amount of cash you need to put down for your mortgage. Mortgage insurance isn’t available for investment properties, so you’ll typically need about 20 percent down to secure financing. Additional cost considerations are potential repairs or maintenance that may be required before you put the property on the market or start looking for renters.
This is another area where having a real estate expert will come in handy. An agent will have extensive knowledge on what is currently on the market and effective tools to get you the best deal. Calculate what your mortgage payments, taxes, and insurance will be and whether this is something you can manage.
If you collect rent from a property, you are required to report the rent as income. However, you are allowed to subtract expenses that are relevant to your property from the total amount each year. For example, if you collect $25,000 in rent annually but pay $10,000 in repairs or maintenance, you are only required to report $15,000.
If you sell an investment property for more than you paid, you are required to report this capital gain to the IRS. The gain is calculated as the selling price minus the purchase price and the cost of any major improvements.
Are you ready to take the plunge into your first investment property? Don’t go it alone! Contact the experts at RE/MAX Results to get started today.