Investing in real estate can be a lifelong dream or a recurring nightmare – usually, it turns out to be both.
What sounds better than owning an island home that you can rent for outlandish prices and also use? What can go wrong? Well, plenty can go wrong, but first you have to find the property to complete your dream.
Real estate typically provides a better rate of return than the stock market with the absence of the market’s volatility. Over time, the value of a property increases, building equity and providing more control over the asset than stock market investing. Historically the longer an investor holds onto real estate, the more money will be made. Since real estate is a highly tangible asset and will always have value, it can survive up and down real estate markets.
In addition, real estate investing comes with numerous tax benefits, such as tax deductions on mortgage interest up to federal limits, deduction of expenses and continuing cash flow. However, if your investment property is also one that you plan to use personally, there are restrictions on the time allocated for personal use in order to qualify the property as an investment and the ability to deduct certain expenses.
Looking for an investment property is entirely different than looking for a home to live in. Investors are or should be concerned with cash flow and the vacancy factor. Ideally, an investor wants to at minimum break even, that is cover all the property expenses with the income from rentals. In fact, if you’re looking for an investment property, that should be your first question – how many times does it rent and what is the annual rental income? Also, if you’re looking for a condo investment, read the condo documents to determine restrictions on renting and advise potential renters of the association’s rules and regulations.
When calculating expenses don’t forget to include property tax, mortgage payment, homeowner’s fees and repairs. Conventional mortgages for investment properties could be a slightly higher rate than owner-occupied properties. In addition, restrictions from Fannie Mae and Freddie Mac will limit the number of conventional mortgages an investor can have. This is usually four, and investors who plan on making more investments may need to look to the private money market for financing.
Most investment buyers on Anna Maria Island are looking for a property to hold long-term since the property values go up almost daily and rentals are lucrative and plentiful. But some are planning to buy low (good luck with that), make improvements and flip the property to another buyer.
There is also an emotional aspect to owning investment property. When your phone rings in the middle of your daughter’s wedding and the tenant has a major plumbing leak, you have to at the very least make a couple of calls. This is why many investors hire management companies to handle emergencies and screen tenants. Hiring a management company, however, does cut into your cash flow.
Real estate is a vibrant business that creates a ton of buzz and is something everyone loves to talk about. Remember the old adage, God keeps making people but not land. On Anna Maria Island, this adage is on steroids; no more land but lots more people.
