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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.