Residential real estate investments can be extremely rewarding. But there are some concerns that should be addressed before acquiring any investment property, and some special considerations when considering an investment in residential real estate in particular. This section of the website aims to demystify some of those concerns. Determine your goals: Topics on this page: Monthly cash flow? Resale for quick profit? Long term appreciation? Tax shelter? Pride of Ownership Single Family Homes Rents Setting Rents Rent Caps Statistics When investors decide to acquire rental properties, they must first decide what they want to accomplish, and over what period of time. The same criteria that is used in any sound investment strategy or financial plan should be used in the rental housing business. If, however, you have decided that you just want to get rich quick, with no money down like they do on TV, get a grip on your world, then come back here when you have learned some real world basics and reality. It is very important to understand that owning and operating rental property is not just an investment, it is a business. Before you purchase any property you should have a plan for how you intend to manage it. You can learn to do it yourself or get assistance by taking courses and joining some investor websites. You can also hire a professional property manager to operate you business for you. Property managers typically charge a percentage of gross income. This usually varies from 5% to 10% of gross income, often with an additional charge for new leases.   The registered user areas of this site contain some good tools for the investor, but you can get an overview of the kinds of information you should know before buying income producing investment real estate here. You will get a good elementary education in this part of the site as we analyze many of the factors prospective landlords and investors must consider before making an income property purchase. They include the following pages: Property Selection Determining Value Financial Analysis Understanding Mortgages Financing Negotiation of purchase agreements Taking Title Tax Ramifications Like Kind Exchange Tips on Buying Real Estate Financial Calculators	Photo Copyright © 2005 Paul Silver Photography Related Topics Financial Matters Tax Deferred (1031) Exchanges of Property Commercial Property Residential Investments Retail & Industrial Properties Property Management Register to access our professional investment management tools!
If you take the time and effort to read or review the pages linked above you will learn more than most real estate investors ever know before they make their first purchase. It is the kind of information experienced investors usually manage to learn eventually -- but the hard and expensive way. Please take the next step and register. Membership will provide valuable real estate investing and property management tools. Of the various forms of investments available that involve possible tax incentives, the most widely used is real estate. Historically, real estate has been sold as an investment for income and long-term gain, as well as a hedge against inflation. Real estate investors actually profit from inflation because with a 30% equity, just a 3% inflationary increase in property values results in a 10% return on investment. Without even considering normal operating profits and tax benefits! Real estate can be purchased in many forms, including: shopping centers, industrial buildings, warehouse net leases, apartments, single family residential housing, and even raw land. The investment can be direct, or through various kinds of partnerships and investment trusts. Single-Family Rental Homes First-time property investors have good reasons to start with these homes When it comes to real estate investments, single-family homes are likely the best choice for first-time property investors. As perhaps the most widely available form of housing, the single-family home is most coveted by buyers and renters. As such, the investment is easier to finance, refinance, manage and liquidate, when compared with larger, multi-family property investments. But residential property investments require up-front cash, financial feeding, management and maintenance -- especially during the early years. Unless your down payment is at least 25 percent or more, the rent you can charge usually won't begin providing positive cash flow for several years after your purchase. Financing: Because the investment saps rental income, you can't use all of your rental income to qualify for investment property mortgages. The exact amount of rental income you can use to qualify depends on the lender, the property, your down payment, other financial obligations, outside income and other loan qualifying factors. From the start, an investment property will cost you more to finance than an owner-occupied home, but you can cut costs by purchasing a condo instead of a single-family detached home, a fixer-upper or a foreclosure property. Also, consider financing through the seller, borrowing against your other investments or retirement funds, or other creative financing tools. Don't expect to enjoy either income or appreciation, however, until after you've held the property for at least five to seven years. Property with potential: To maximize your return, shop for investment property much in the way you'd buy your own home. Consider fixer-uppers that don't need major upgrades. Buy the cheapest home in the best block or buy into the cheapest neighborhood in the best community. Buy in areas where demand for housing will eventually exceed supply. And if possible, buy in a down market to later enjoy the equity-building benefits of an upturn. Because you'll have to keep tabs on your property, it's wise to buy it within easy access of your own home. Investment management: Unless you have the knack and the time to manage tenants and property, your costs will include hiring a property manager. Along with advertising vacancies, screening tenants and looking after maintenance, a property manager can also help you project how much you can charge for rent, make sure you perform required disclosures and fill you in on renters' and landlords' rights.   Taxes: As investment property, all expenses, including utilities, repairs, property taxes, mortgage interest, maintenance and condominium fees are income deductions that likely will produce a taxable loss, subject to the passive activity loss limitations. You can also deduct depreciation over 27.5 years. Rather than net income from rental payments, most investment property owners hope to realize a return when they sell the property. How you sell determines how much, or how little income you'll realize once you pay taxes. Generally, when investment property is sold outright, any long-term gain (on investments held longer than 12 months) is taxed at a capital gains tax rate that ranges from 10 percent to a maximum of 20 percent, depending upon your tax bracket. Capital losses are deductible from capital gains and, to a limited extent, other income. If you choose an installment sale, you finance the purchase and any gain is realized and taxed over the loan's period. Also, you can conduct a tax deferred or tax free exchange. If you trade up to another more expensive investment property, taxes can be deferred. The trade can be tax free if you trade for another similar investment property.   Perhaps the largest tax savings are available to those who take advantage of the tax exemption designed for homeowners who live in their homes. You'd have to move into your rental property and convert it to your owner-occupied home for at least two years. When you sell, you'll benefit from the personal property tax exemption on $ 500,000 in capital gains for joint returns or $ 250,000 for single or separate returns. Rents In the years before Carter and double digit inflation rent rates were usually a simple factor of a property's value. Therefore, determining likely rents was relatively easy. A typical one or two family home rented for about 1% of the fair market value . A landlord's success now depends on whether he is capable of finding, fixing and providing rental property profitably, at rents determined by forces that have little to do with a free market, or landlord's cost of doing business. There are as many misunderstandings about how, when, and why landlords raise the rent, as there are misconceptions about landlords. Certainly, in a free market, competition is the most important single criteria. However, in the real world, (at least that of low and moderate income property) government now plays the major roll in setting rental rates. Rent rates always depend on several factors: Competition Your ability to market the property Government Tenants ability to pay Rent Control How To Set The Right Rent Have you ever wondered if the rents you charge for your rental units are in line with the marketplace? Does it take a long time to rent up your property or does it rent in a day? The worry, of course, is if you have more phone calls than you can handle, you may have priced the property too low. If you have no calls, maybe you're units are priced too high. How do you find the best rates? A good place to start is to look in the local Sunday paper. Notice that the classified section is divided by geographic area. Location is the most important guide to value for a renter. The same 3-bedroom, 1-bath house will rent for $ 500 in one part of town and $ 750 in another. Most people look for a location close to work or close to schools for themselves or their children. Many people also want to live in hip or trendy neighborhoods or in neighborhoods where they grew up in, close to friends or family members. Older renters like to live close to shopping and medical suppliers, like doctors or hospitals. Some renters want to live close to major arterials or freeways to speed up their driving around town. Every city and town has different rental patterns, and in many cases those patterns relate to geography. You have probably heard of the "West Hills" or the "south part of town" or the "Northwest neighborhood." Sunlight drives value. The brighter the area and the better the views, the more motivated people are to live there. The income or budget of the renter will also drive the decision of where to rent. Most tenants have limited funds and at the same time they have needs they want to fill with those funds. Some tenants want a swimming pool, some want a specific neighborhood and some just want a small studio while others need more room. In many areas square footage of the rental will drive the rental value. In other words, the bigger the apartment or house, the more money you will get. Rental Rates Have an Upper Cap Remember that when 67 percent of the nation are homeowners and only 33 percent are renters, there is a level at which renting a house does not make sense. Few will want to rent especially when the interest rates are low, builders have overbuilt, and financing with little down is very attractive. Also remember Uncle Sam helps ownership with interest deductions and property tax write-offs. You could join the local apartment owners association to share rental rate information with other landlords. You will find that local trends will affect you as well as others in the marketplace. If you think you have set the rent right and the property still is not renting, maybe the property is facing an economic slump that is affecting all owners. Or maybe the lawn needs to be cut, or your "clean" is not as clean as the tenants would like it. Maybe you are advertising in the wrong place. Is it is possible you bought your investment property in the wrong location? Just last week a tenant looked at one of our properties and was accepted as a tenant -- but decided to turn down the unit because it had ceiling heat and very high electric bills. Basic amenities also drive the rents. Dishwashers, washer/dryer hookups (or a convenient laundry room), off-street parking, and cable TV hookup are some basic examples. If those are not available, consider renovating or find another angle that will attract tenants, like hardwood floors or views. Most tenants, being reasonable, are not attracted to dilapidated settings. Market Statistics The magic of setting rents lies in your ability to track the market, which is fairly easy now with the Internet -- and be in tune with it. Great marketing and advertising will also have an impact on your ability to rent. It is important to keep track of market statistics. Factors like new job creation, new people moving into town (or out of town), rent control (which in some areas may limit your ability to charge market-rate rentals), the number of units in the pipeline, and new homes under construction will help give you a feel for the marketplace. This will let you know how to time your leases and their expirations as well as your rent increases. Sometimes in a weak market you need to offer some concessions like free rent, a TV, or lower move-in costs to attract tenants. You can always set your rents a little high and see if the phone rings. It's easier to lower a rent than to increase it. It's smart to annually review the marketplace and stay in touch with changes in the marketplace. Nothing replaces the time you take to inspect the property and decide that this is where you could live. Happy tenants stay longer and will pay rent increases.

 

 

Paul Silver, Owner

Focus Professionals, Inc.

Rhode Island Real Estate Services

http://www.HomeSalesRI.com