Building Wealth with Rental Properties
If you are considering making a real estate purchase for rental purposes, you will choose between commercial and residential property. You need to assess your own financial situation first, as this is not the most liquid investment. It's important to determine how much money you will need up front, how much money you can borrow, and what the terms of the loan will be. Investment capital is the first item on your agenda. If you do not have it, you'll need to borrow it. New investors are usually advised not to borrow for the purpose of buying real estate. Unlike stocks or bonds, you cannot start out with a $100 investment.
Real estate investing can come with a big tax benefit. Special tax incentives for real estate investors can make a big difference in your ultimate tax liability. Rental property deductions may be used to offset other income. In fact, tax breaks can transform real estate losses into profits.
Make sure you do all your homework about a property's location even if you think it's a once-in-a-lifetime deal. A house that seems like a steal today may not seem like such a great deal in a few months when a major highway construction project comes through its front lawn. Find out from the local municipality what building projects are slated nearby — particularly projects like schools, highways, shopping centers, and industrial or commercial centers. All of these developments can impact traffic issues and property values. Sometimes a great property offered at a great price means the seller knows something you don't about an upcoming event that will impact the resale value of the property. If you are purchasing a commercial or residential property with the idea of renting it out or selling it in the future, you need to consider the following:
Is this a prime location? Remember, location still means everything in real estate.
Has this property been rented successfully before?
How old is the property?
Has it been thoroughly inspected and given a clean bill of health? You may need to arrange for this yourself, thoroughly inspecting and fixing electricity, plumbing, and the foundation and roof. Everything must comply with local safety ordinances.
How much renovation and work needs to be put into this property? This will follow, in part, from the inspections. Changing the interior to fit your business or rental needs is an important cost factor.
How much will it cost to maintain the property? Do you need gardeners? Will a janitor be needed on the premises at all times? Upkeep is important in evaluating the potential resale or rental value of the property.
What are the zoning laws in the area? This is particularly important if you are opening a new type of business in a commercial property.
What is the accessibility to and from the property? You may find the perfect little hideaway for a summer rental, but a business property will need to be accessible.
What plans are being made for the future of the area? Is a new highway coming through that would help your business by providing high visibility, or will it ruin the vacation value of your secluded villa?
How much insurance will you need? What are the rates for that property in conjunction with the purposes of your investment?
What property taxes are applicable? What can be deducted?
If this list hasn't scared you off, you might be the ideal real estate investor. Not unlike investing in stocks, there is an issue of timing when it comes to investing in real estate. The stock market, over time, tends to end up ahead. Real estate should as well. However, the economic climate can change, so real estate, like any other investment, can be risky.
