Table of Contents
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While owning your own home has many benefits, there is a way to invest in real estate that can also produce a steady flow of income. However, this oversimplifies the subject. This article discusses the basics of real estate investing.
1. Hire an Attorney
You will need to protect your personal assets in the event of bankruptcy or litigation. Many form a limited liability company (LLC) or limited partnership. There are ways to do it online, or you can consult an attorney. This is one area where it may pay to consult an expert since the cost of not doing it right could be catastrophic to your personal finances.
2. What type of property?
There are a myriad of investment properties. Will you purchase residential properties? If so, will it be a single condo or co-op unit, or the building? If it is a co-op, the board may have restrictions on subletting. Multi-units or multi-family homes may have more upkeep, but you will still have a cash flow if some of the units remain empty.
A wide range of commercial properties are available, should you choose to go that route. While the tenant typically is responsible to take care of more things, the complexities also rise.
3. Where should I invest?
We won’t repeat the maxim about the three most important rules for real estate, but clearly location matters for your investment.
New York City has very favorable investment characteristics. It is a cultural and commerce powerhouse. Unlike the 1970s, the city has a reputation as a safe city. This blog gives a better explanation of the attractive characteristics of New York’s real estate climate.
But, you must still decide on a neighborhood. In general, economic factors such as income growth, proximity to transportation, and neighborhood characteristics such as the types of shops and restaurants are considerations. A well-informed agent can assist with this task. For a risk-averse real estate asset, we recommend thinking micro markets within New York City.
4. Time Frame
As with most investments, your time horizon is an important consideration. You can buy a fixer-upper, in the hopes of making a fairly quick profit. This can be high risk as hidden problems could get discovered or the real estate market changes direction. However, the potential rewards could also be high. Conversely, your time horizon might be measured in decades, and you will be content collecting stable rents, although potential appreciation could be substantial given the long time frame.
This is a broad category to consider, but an important one. If there are existing tenants in place, that provides immediate income. But, contemplate whether the rent is market-rate. In addition, it is important to remember you have not personally done the background check and vetted the tenet.
6. Outside management or go alone?
There are management companies that will lessen your burden. Typical tasks include collecting rent and dealing with troublesome tenants. However, this comes at a price. Most charge a fee that is a percentage of the rent.
7. Taxes matter
There are special considerations. This is a complex area, with many rules, such as deducting non-cash items like depreciation.
Investors should also be mindful of tax abatements. These buildings have had property taxes lowered for a certain period of time in order to help revitalize an area through development. The cash savings will increase your take-home income, and your property could experience price appreciation, providing things go according to the city’s plan.
This goes beyond examining for structural issues like the condition of the roof. Since it will be rented, the apartment must be clean. Beyond that, it might have to be spruced up so it includes items such as up-to-date appliances. This could require additional cash outlays, and may cause a loss of rental income until the unit is ready.
If you are investing in a condo or co-op unit, financial stability will be important. There should be sufficient funds put aside for wear and tear items such as a new roof. Otherwise, maintenance fees could increase, which you might have to bear until you can raise the rent sufficiently.
In a multi-unit building, examining the financials is also important to see how the returns are derived. For instance, if there is a large unit that generates a disproportionate share of the rent, this is an important factor.
10. Return on Investment
Needless to say, it is important to measure profitability. However, in isolation, it means very little. Rental income, less monthly expenses such as maintenance, repairs, and financing costs, gives net income. However, it should be compared to the amount invested. The percentage should be compared to other investments. For instance, if you have a 2% return, and the 10 year Treasury bond is yielding 2.8%, you would be much better off in the latter. This is especially true since the risk of losing your principal is extraordinarily small (most consider it a risk-free investment).
There are a couple of other considerations. Although the purchase price is typically determined based on square feet, renters typically look at the number of bedrooms. Therefore, if extra bedrooms can be created, a smaller unit may command a higher rent while costing less to purchase. In addition, it is important to analyze sales and rental data. The two do not always move in lock-step, and there have been instances where sales prices have risen faster than rents.
In real estate, leverage, or borrowed funds, is often used. This potentially increases returns since you can purchase a property with a down payment and pay the balance over time. Of course, it also increases risk and magnifies losses in a downturn.
This gives an outline for investors to consider. Real estate investing can be profitable through rental income as well as price appreciation. But, as always, it is wise to investigate and consult an exclusive buyers agent before a large investment is made.