Understanding Risk When Investing In Real Estate
More investors are considering real estate when it comes to investing their hard earned money. Some investors are looking for a better return on investment through higher yields as compared to other investment vehicles or they think real estate is a great and easy way to invest based on investment seminars or real estate investment websites where everyone is sharing their success stories. Investing in real estate can be a great way to own some land and build long term wealth. The caveat though is real estate investing is more costly than other investments (buying stocks) and if not done properly can quickly lead to an investor feeling financial pain due to mistakes made. This article will explore some of the different types of real estate investment risks there are so potential investors can make fully informed decisions.
Risks With Buy and Hold Investing
One of the most common real estate investing method is the buy and hold method where investors purchase real estate with the goal of long term appreciation in value of their investment and receiving regular income from renting out the property. With this type of investment investors will either purchase turnkey rentals (ready to rent out) or look for the value add opportunity where work must be done to the building in order to boost rents. Buy and hold rental investments can include office space, residential space, commercial retail space, and warehouse space.
Legal Violations With Residential Real Estate
Higher risk comes from...
What Is A 1031 Exchange In Real Estate?
The Internal Revenue Code (IRC) 1031 (26 U.S.C. §1031) provides for the deferral of capital gains when selling and buying like kinds of property. In the past the type of property that could be exchanged was more open but as of January 1, 2018 1031 exchanges only apply to real property AKA real estate. An example would be a real estate investor who has a single family rental home that they purchased for $100,000 ten years ago and wants to sell it today to buy a multi-family building. Today the rental home is worth $200,000 due to improvements made in the home and increase in overall real estate values. Without a 1031 exchange the investor would have to pay tax on the $100,000 in gain ($200,000 sale price today minus the original purchase price of $100,000). Through the process of a 1031 exchange the investor can use the proceeds from the sale of the single family home to directly purchase the multi-family building and not have to pay tax on any gains. Obviously that is a very simplified example and there are many more moving parts to a 1031 exchange which this article will explore.
(Note: nothing in this article should be taken as tax or legal advice. 1031 Exchanges are highly complex tax transactions that should be processed with the assistance of local experienced legal or accounting professionals.)
Why Use a 1031 Like Kind Exchange?
The real estate you will be selling and purchasing for a 1031 exchange should be investment real estate, in other words real estate used for the production of income...
5 Smart Tips For Buying An Investment Property
With the recent boom in real estate markets all over the US many people are looking to real estate for investment purposes. Buyers are looking to buy commercial and residential properties with the goal in mind of renting out those properties and generating cash flow. Investment in real estate can generate good cash flow with better rates of returns than stocks and other similar investments. This article provides a number of great tips for the new real estate investor or the seasoned investor to make sure when the right property comes up they are ready to take advantage.
Having Your Funds Or Pre-approval In Order
While this is often repeated when it comes to buying any type of real estate it bears repeating since it is so important. In many markets real estate is selling fast (even investment real estate) and if buyers do not already have a mortgage pre-approval ready to go they will lose out to other buyers who do have a pre-approval. No seller wants to add extra time to a transaction for a buyer to get pre-approved when they get offers with buyers who may not only be pre-approved but may even be an all cash buyer.
When it comes to an offer where a buyer must get pre-approved versus a cash offer the cash offer will win every time assuming everything else is the same. Cash buyers often forgo asking for an appraisal as they are comfortable with the purchase price since they have usually run their numbers and know a good investment when they see one. If a buyer is not pre-approved that means there are two areas to cause a deal to fail, the buyer can fail...
Tips For Financing An Investment Property
Using a mortgage for financing an investment property is quite different than taking out a mortgage for a home you intend to live in. Since you will be living in the home you are borrowing for lenders are more comfortable lending you money to purchase that “owner occupied” home since as a resident you are more likely to take care of it while living there. On the other hand buying an investment property where you do not intend to live in may mean you are less likely to care for it or may take on higher risks with the property than the lenders are comfortable with. As a result the lending criteria for investment properties are much stricter and the interest rates are higher than they are for owner occupied homes.
How Much Money Do I Need To Put Down When Financing An Investment Property
The amount of down payment required for financing an investment property depends on who the lender is and what type of property you will be purchasing. Some smaller lenders who hold the mortgage in their own portfolio rather than selling to a government sponsored enterprise (GSE) may be willing to lend with less money down than a lender who intends to sell the loan down the line. The GSEs like Fannie Mae and Freddie Mac will often buy loan packages from lenders in order to ensure that the mortgage lenders can continue to offer mortgages and not be frozen out of lending more due to lack of liquid cash. For more information on the GSEs and mortgages check out 20 Important Mortgage Terms To Learn About.
Tips For Buying An Investment Property
Buying an investment property with hopes of making income from rent or flipping the home for a profit is a somewhat different process than buying a home to live in. Often times buying a home for flipping involves a quick transaction with cash or a ready to use line of credit used to purchase the home. When buying a home with the intent of renting it out for income the lender will look at your credit worthiness and asset base. Residential rental properties require active management and the legal requirements for dealing with residential tenants are much stricter than they are for commercial tenants. By understanding what is involved in the process of buying an investment property for rental income or with the intent of flipping for a profit you put yourself in a better position to make a smart decision as opposed to one that could cost you money in the long run.
Fix and Flip Investment
With a fix and flip investment the idea is to purchase a home with the intent of updating the home and repairing any issues that the home has. Once repairs and updates have been made the home is put back on the market in hopes of making a profit based on a higher value due to the repairs and updates made. Usually fix and flip investments are held for a short time frame while the repairs are being made. Before buying a home to fix and flip you should make sure you are very familiar with the home repair and remodeling process as there can be hidden issues within a home that can blow your entire repair budget which will then require you spend more than you anticipated. Be especially on the lookout for lead paint issues, asbestos issues and foundation issues which may require...