Does taking more risk when you invest truly yield more rewards? There are a few ways to reduce your investment risk and increase your reward. Understanding the basics of what makes a great investment property can make all the difference. Any real estate property purchased with the intent of generating a return on the investment, whether through rental income or a future sale, is considered an investment property.
There are many types of investment properties:
- Apartment units
- Condominium
- Duplexes
- Fourplexes
- Mobile home parks
- Multi-family buildings
- Single-family homes
- Townhouses
Rewards of investment properties:
- Generally, real estate values for income properties are stable.
- Real estate is a tangible physical asset.
- Rental income is not subject to Social Security tax.
- Rental income is passive income to pad your bank account to further invest and generate a healthy cash flow.
- Investment properties are commonly used as a way for investors to pay down personal debt, secure a down payment for future investments, help qualify you for higher loans with lower interest rates and retire early.
- The interest on investment property loans is tax-deductible.
- When real estate values increase, your investment appreciates.
- Investments offer several 1031 exchange opportunities to avoid sales tax and several benefits of purchasing a “like” or better investment with the proceeds.
- You can direct real estate into a self-directed IRA (SDIRA)
BECOMING A PROPERTY INVESTOR
Are you ready for an investment property?
There are a few ways Investors obtain their income properties and expand their portfolios. Some Investors purchase a complex with proceeds from a previous sale and some homeowners rent out their personal home for either a short-term or long-term investment. Whatever your goals may be, understanding the basics of investments and having the right team can make all the difference.
Qualifying to purchase an investment property is considerably different from qualifying for a primary residence. Financial stability is one of the predominant areas lenders focus upon when considering your loan.
Mortgage lenders require a higher level of financial stability for investment properties compared to primary residence mortgages. Typically, a down payment of 15-20% is required for investment property. Additionally, many states require an inspection if it is a rental property. Being financially stable requires you to have the funds to cover the purchase costs of the investment property, such as the down payment, inspection fees, taxes, and other closing costs. Having a healthy savings account for any unexpected maintenance repairs down the road is a must for each investor. Emergency HVAC and plumbing repairs can be expensive—having those funds available make it much easier to handle those types of repairs more expediently.
Other investment property expenses include credit checks to ensure you take in the best renters and advertising costs. Having good-paying tenants are an asset to your property, keeping your costs down and making it easier to manage or sell.
What is a Return on Investment (ROI) ?
To realize maximum returns on their investments, savvy investors calculate their ROI before purchasing a property. The Return-on-investment measures how much money, or profit, is made on an investment as a percentage of the cost of that investment. Once you’ve found a potential income property, it’s time to review the expenses vs income. For example, property value, property repair costs, square footage and number of bedrooms (property details). Next it’s important to consider and factor in repair costs if the rental will need renovations. Renovation expenses should make sense for the area and rental rate. You don’t want to over renovate when other comparable homes are renting quickly at fair market value for less upgrades. This will directly impact your ROI as costs will exceed the monthly income and will take additional time to make the money back. Lastly, annual rental expenses. This would include property taxes and insurance expenses. Reviewing all of these details about the property will better arm you with which investment will provide the best return for you.
There are several reporting methods to use throughout the year to better gage the performance of the property to ensure a healthy ROI each month. A few reports include a Profit and Loss statement (shows income vs expenses for the day, month, year or previous years for comparison), Rent Roll, Budget sheet, and a general ledger to itemize supplies. Investing in real estate, and more specifically in rental properties, can be one of the most lucrative and safe investments people can make. It might seem intimidating to know where to start, but rental property investing is for anyone and everyone.
Do you have the time to manage it?
Managing an investment property requires time and commitment—without one of the two requirements, you may experience runaway expenses that you may not be able to reign in. You will need time to set up your adverts, interview and fetter out potential renters, run background checks, track tenant payments, and perform repairs and maintenance on the property, as well as things that break down in tenants’ homes. Before deciding to buy an investment property, ensure that you can meet the commitment level required. If not, it’s important to select the right management firm who understands and can support your investments unique needs and the direction of your goals with the property.
Most management firms welcome the investor to be involved as little or as much as they prefer. We suggest being highly involved during the first couple of months to ensure you’re comfortable with the management firm’s communication style and ability to provide you with the necessary tools to call the shots on your investment. Suppose you have or are considering purchasing an investment property in Colorado Springs, Denver, Manitou, or Pueblo. In that case, Progressive Property Group provides customized management options. From finding the right investment property to keeping your units occupied to ensuring that tenants are complying with the by-laws, you can rest easy knowing that your property is being well-managed, allowing you the time to focus on other business or personal ventures.
Vetting applicants and ensuring you have the best set of occupants is just one more benefit to hiring PPG; their goal is simple – to make your rental property work for you, providing you with monthly reports and annual inspections.
BENEFITS OF HIRING A PROPERTY MANAGEMENT COMPANY
Some believe handling property management, repair, and maintenance themselves can save them money. However, this may not always be the case for investors who are not familiar with Colorado law and commission approved forms for when tenants don’t adhere to the lease or don’t pay rent. Many of these situations can result in tenants legally withholding rent or taking investors to court.
As mentioned earlier, hiring a property management company, such as the Progressive Property Group, allows your management firm to be the bad guy and handle the following:
- Routine inspections
- Collect rent
- Post demands for payment or lease violations
- Enforce the lease and HOA guidelines
- Stay involved in continuing education courses several times a year to ensure they are up to date with the law changes throughout the year and update the state required forms
- Offer an Attorney for legal advice and court hearings so the client doesn’t have to attend or be involved
- Thorough pre-qualifying process for tenant screening to ensure each tenant is well-qualified and limit possibilities of eviction cases
Project management for turns each time a tenant vacates
Offers a fully staffed crew to oversee renovations and vendors
Pull market analysis 60-days prior to a lease expiration to ensure you’re receiving fair market value each turn and staying competitive with other homes in the area
Advertising and showing your investment and minimizing vacancy rates
Take scheduled and emergency repair calls on holidays, weekends, or afterhours
These are just to name a few of the responsibilities of an investor and property management firm. There are a lot of moving parts when it comes to an investment property. Having a thorough understanding of your investment and it’s unique needs is necessary before you buy. Progressive Property Group can help accomplish your financial goals for your investment and arm you with the correct tools to maximize your return.
REAL ESTATE SALES & PROPERTY MANAGEMENT IN COLORADO SPRINGS
Progressive Property Group is the only real estate sales and property management agency with real estate agents dedicated to property management. For more information on our services, you can reach us at 719-634-6490 or contact us today.
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