Even if you missed the huge buying opportunity that directly followed the 2008–2009 market crash, now might still be a good time to look into investment properties. You wouldn't be alone in that endeavor. According to a National Association of Realtors survey, investment home purchases rose 4.5 percent in 2016.
Although some national trends point to 2018 as a seller's market, there are still deals to be had, and investors can find both the properties and the financing necessary to make a good investment. The only thing left to consider is the potential cost associated with making an investment in the property you currently have your eye on.
Consider the Cost Associated With Both Cash Deals and Financing
All-cash deals can easily make you feel like a winner because you cut through many of the additional costs and paperwork that come with financing. But it's important to remember there are upsides and downsides to both cash and financing.
Paying for your investment property with cash can help you secure the home and cut out other potential bidders. And you are, of course, eliminating the fees, interest and closing costs that come with a loan. In a seller's market, cash is the more attractive offer because the seller can settle the transaction quickly and the buyer may be able to purchase the property for less.
However, putting down cash to purchase an investment property outright means you will have less cash on hand to deal with issues that might arise with the home. So if the home has unexpected and necessary repairs, spending the majority of your cash on the home purchase to cut out other bidders might put you in an unfavorable position when the unexpected happens.
Financing your investment property through loans can make sense to help free up the needed cash resources for repairs. But of course, financing an investment property will come with all the associated costs, including mortgage origination fees and interest. And some lenders will place additional surcharges on your interest rate for investment properties versus a personal residence. During the loan application process, your lender will likely ask if the property is an investment or a personal residence, so be prepared to answer truthfully and ask whether there are extra fees associated with that loan.
Your Insurance Needs May Be Different
Even as an investment property, you will still need to carry homeowners insurance on the property. However, the type of insurance you purchase may change depending on how the investment property is used.
For example, if the home is exclusively a rental property with regular tenants, a landlord policy on the home will likely be a wise investment. The coverage on a landlord policy is similar to a homeowners insurance policy, but it won't carry some of the additional coverages. For example, your landlord policy likely won't include coverage for personal property inside the home, except what's necessary for the home's maintenance.
The landlord policy also provides some necessary liability coverage. This is especially important as you may be found liable for a tenant's injuries in the home if those injuries are directly related to maintenance concerns. Landlord insurance is a common offering from insurance companies.
However, if your investment property is more of a short-term rental vacation home than it is a long-term rental, you may want to consider a special vacation rental insurance policy. These policies offer more specialized coverage, particularly given you own the contents inside the home.
Finding Suitable Tenants Will Cost You
While you might be able to find great tenants with relative ease, there's a chance you'll have to sift through many low-quality applicants to find the right ones.
Your best option is to search for tenants through high-quality websites, such as Zillow, or a website dedicated to local listings where your property is located. For those looking to acquire long-term tenants, many of these sites allow you to post for free, although some do charge. Regardless, you'll want to consider the opportunity cost associated with your time as you work your way through a pile of tenant applications.
For vacation rentals, you'll likely incur some listing and renting costs through popular sites like Airbnb and VRBO. Those sites charge a service fee that's a percentage of the rental price, but they're also some of the best options to find and evaluate decent renters.
You May Need to Cover HOA Fees
Homeowners associations (HOAs) are a blessing and a curse. For investment property owners, you may need to eat the cost of the HOA fees. There's always the option to roll that cost into the rental price, but you'll risk running off potentially good tenants if you do.
Investment Properties Are Taxed Differently
When you rent out a home, that rental income is still income. However, how you report that income can be somewhat complicated, so be sure you study up on how rental property income is taxed—or hire a good tax professional to help you manage the extra tax headache. For example, there are limits to how many days you can stay in your rental property, and there is even a limit on how many days you can rent the home without having to report taxes on any of the rental income.
While the government provides tax incentives for primary residences, many of those incentives don't exist for investment properties. You'll need to explore those additional costs and the potential deductions that exist for your investment property.
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