Create Wealth Through Property Investment

by Jon Dulin

BuyingahomeThe following is a guest post by Betsy Fallwell. If you are interested in writing a guest post, please review my guest posting guidelines.

Interest rates have never been lower; property prices are still struggling to recoup the losses of the housing crisis. These key ingredients add up to the perfect recipe for jumping into the world of property investment.

Investing in property can sound risky, but if you work with the right people, it can be an amazing way to create wealth – and not just any type of wealth, but passive income, the type of earnings that require very little day-to-day effort on your part.

Commercial vs. Residential Property Investment

Before you become a landlord, you’ll have to decide whether you want to focus on commercial or residential property management. Business properties are often located in shopping centers or other areas that have been zoned for commercial use; residential properties can run the gamut from a small apartment building – with multiple tenants – to a single-family house. Commercial property investment usually relies on securing commercial financing, which can be difficult, especially for newcomers to the industry. More capital is usually required up front, along with a proven business model; if you can’t put enough money down to secure a loan on a commercial property, you may be able to get financing if you can prove you’ll have a stable cash flow coming in, perhaps from renters who have already signed a lease.

In some cases, you may also be required to secure commercial financing if you want to buy an apartment building. Lenders have different rules regarding what constitutes a commercial venture with regard to apartments; some consider it anything more than a single-unit residence, while others may allow you to purchase a duplex or even four-unit apartment building using non-commercial financing.

Locating a Property

With so many distressed properties on the market – or still lurking on the “shadow market,” waiting for banks to put them up for sale – searching for foreclosures should be your first step. Working with a real estate agent – either commercial or residential, depending on your investment preferences – can help you quickly locate available properties.

But be aware: buying a distressed property may save you money up front, but you’ll likely have to invest tens of thousands of dollars just to bring it up to code. Before making an offer, be sure to bring in a contractor who knows local property regulations to give you an idea of how much you’ll have to pay to get the property in working condition.

Affording Property Investment

We’ve already discussed the different financing paths related to commercial and residential properties. If you want to increase the odds you’ll get approved for a loan, you may want to consider going in with a partner. This individual can help you boost your down payment, overshadow a weak credit score on your part, or simply help you with the day-to-day management of the property. Just as its easier to secure a mortgage as a homeowner with two people instead of one, so it is with property investment as well.

What about affording the post-purchase repair costs? Try using some of the equity in your property to finance those repairs. If you bought the property through a foreclosure, auction, or short-sale, you may have enough equity to take out a HELOC (home equity line of credit). This lets you use the equity in the property like a credit card, giving you cash for expenses like plumbing, electrical work, carpentry, etc.

Wait, There’s More!

In addition to collecting rent on your investment properties, the government can make property investment an even more lucrative option. That’s because the IRS offers tax benefits to property owners. The list of potential tax deductions include:

  • HOA dues
  • Repair and upgrade costs
  • Costs to advertise a vacancy
  • Interest on the mortgage
  • Maintenance costs

Turning It Into Passive Income

You can make property investment a source of passive income by hiring a property manager to take over the day-to-day tasks of overseeing the property and any tenants you may have. This person would be responsible for things like maintenance and collecting rent; they’d also be the first line of response to any problems or complaints from your tenants. You’d be in charge of paying this person (if your co-owner took on this role, he’d likely earn a larger chunk of the property’s rental fees), but other than that, your only responsibility would be sitting back and collecting the profits.

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{ 10 comments… read them below or add one }

John S @ Frugal Rules January 23, 2013 at 10:01 am

I think investing in property can be a great way to diversity one’s investments, especially in light of the current rate climate. However, there can be a lot of expenses that can chew up potential return, not to mention the time spent.
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Sean @ One Smart Dollar January 23, 2013 at 10:45 am

Property investment is definitely risk/reward like most investments. The biggest difference between this and investing in the market is you have no control. You can get bad tenants who cause a lot of damage or you can have a lot of things go wrong in the house. These are things you can not plan.
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moneysma January 23, 2013 at 12:42 pm

You can do your best to screen potential tenants, but you are correct, you never know…

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Kyle @ YPFinances January 23, 2013 at 2:15 pm

I would love to be able to have an investment property but with everything else I’m saving up for, I haven’t been able to make that dream a reality. Hopefully in the future, that will change because it’s definitely a great way to diversify investments, as long as you are lucky with tenants that is.
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Canadian Budget Binder January 23, 2013 at 11:56 pm

We’ve been talking about potentially investing in a house to rent out as an investment. There is so much more than some people think and instead of jumping in head first we want to take our time and make sure we know what we are getting ourselves into. My family does this with a few homes and it supplements their income since they have been paid off for many years now.
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Lisa @ Cents To Save January 24, 2013 at 7:18 am

We have a rental property by default. We bought a new home 18 months ago, but due to the economy and a recent re finance on the first home we were unable to sell it. Luckily we have good renters.
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Greg@ClubThrifty January 24, 2013 at 7:38 am

We love property investment. While you may not have as much control – as in you can’t be a day trader – you do have a “REAL” investment. Not only will the investment hopefully grow, but it also pays you money while it is growing. We love it!
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Finance Inspired January 24, 2013 at 9:01 am

Another great post! I find investing in property, although risky, can produce a return that you won’t be able to make as easy in other investment areas. Once you’re into it its addictive! great post, keep up the good work.

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WorkSaveLive January 24, 2013 at 12:24 pm

I really can’t wait to become a landlord but we’re waiting until we’re financially sound to do so. I think the more financially well-off you are, the more flexibility you have when choosing tenants. The better tenants you choose the less likelihood there is to have a bad renter (one that doesn’t pay rent on time or trashes the place).
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My Financial Independence Journey January 26, 2013 at 7:49 am

I’m still considering whether becoming a landlord is a good fit for me. Currently, I’m leaning towards no. Housing prices are just too expensive here. If I was going to aggressively save for a down payment, I would have to go several years without making contributions to my dividend growth stock portfolio. This would delay my goal of achieving financial independence by age 45.

I do realize that some people would advocate a real estate investing strategy, but I am of the opinion both strategies are equally viable.
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