Advice On Investment and Rental Properties
So you’ve decided to venture into buying a real estate investment property. Lots of things to think about and explore.
The first step is financing.
How will you pay for the property? What costs are involved?
Investing is not for the faint of heart or for risk-averse buyers. Be sure you are ready to handle the pitfalls and problems that will most probably surface.
If you don’t want to get phone calls from tenants with repair issues, then you need to hire a property manager to field and handle those calls. That cost is usually 10% of the rent but can be a fixed monthly fee. You need to figure this cost into your calculations.
Most investors are looking for approximately a 15% ROI (return on investment). This would be after paying mortgage, taxes, rental fees and repair costs as well as property management costs if applicable.
Banks require a larger down payment with an investor property since the risk is greater, so plan on 25-30% as a down payment.
The interest rate is also higher than a conventional single family home loan, usually at least ½ point or more. The other cost to factor in if you are considering keeping a property that you have been living in is the loss of the STAR deduction in New York. That is only for owner-occupied properties.
The biggest issue to consider is what kind of property you wish to purchase.
Most co-ops do not allow renting, so while they are the least expensive of the possibilities this generally rules them out.
Condominium
Condominiums are actually the best option for the first time investor for a number of reasons.
The cost is lower than a single family house.
The exterior maintenance is taken care of by a management company.
You do pay common charges as well as taxes but it eliminates issues with outdoor maintenance like snow removal and lawn care and most condos do handle roof and heating costs, but that is not always the case and it is very important to check these details before making a purchase.
If the condo provides heat and hot water they will also take care of that maintenance. Be aware, however, that when major items like a roof or new heating system need to be replaced the management will assess each owner for their share of the cost, so it is very important to check the age of those various items before purchase and to check if any assessments are in the works. This could seriously affect your ROI!
Generally, buying something that is new is a good first step, but in New York the costs may be high.
As long as you can get a higher price when selling the condo it may make sense, but make sure that your numbers are accurate and allow for some fluctuation due to market conditions.
You also need to consider the rental market in the area you are exploring. If it is overbuilt it will affect your ability to find a renter quickly and you may find yourself paying for an empty apartment.
If possible, It should also be near transportation and restaurants, as well as shopping. This will give you a greater possibility of renting quickly and at a good price.
Single-Family Home
When purchasing a single-family home as an investment, the best option is to buy a fixer-upper and then do the renovations and rent it. If you buy something already remodeled, the cost of the house may make it impossible to get a return that is worth your investment. Also, in most desirable markets, there is a lot of demand for houses in move-in ready condition and finding a house that makes financial sense may be more difficult.
Multi-Family Home
Another possibility is a multi-family home. Those are usually divided into 2-4 units. Larger buildings with more apartments often have more rules, like rent control. Do your homework and understand the rules before buying, but be aware the government can change the rules as they just did in NYC. This can seriously impact your bottom line and the eventual sale price of the property when you are ready to sell.
One other option is to buy a 2-family and use one apartment for yourself and rent out the other to help pay the taxes, upkeep etc. This has been a popular and financially savvy way for many families to own a home and still benefit from additional income.
You do have to be willing to accept less privacy but for most it is a good trade off. Finding a tenant that you are compatible with is very important and probably the most challenging part of this type of arrangement.
Benefits of Investment Properties
The main reason most people want to own real estate for an investment is because they know that over time, even if the price does not increase, they will pay off the mortgage and own a debt-free asset.
There are also tax incentives like depreciation that make it worthwhile. Once the property is fully depreciated you can also transfer the earned equity into another property of equal value to avoid paying capital gains taxes. You should always speak to an accountant to get full details on a 1031, or Starker exchange, before attempting one.
Be sure that you are prepared for the ups and downs that will accompany this type of investment. It can also be a very rewarding experience. Call us to discuss if you wish to explore this option further.