Pros and Cons of Investment Properties
You are wise to consider all investments carefully. Though economists quoted in Money say rental properties today constitute “the “opportunity of a generation,” it’s a long-term investment.
They also say buying real estate and holding it creates wealth and that most millionaires achieved that standing through real estate.
Here are a few factors to consider when selecting a property.
- Look at properties in a stable area that is near an employment center, such as a university or hospital.
- Consider properties in your own neighborhood. It makes sense to stay close to home.
- Do the calculations. Make sure the rental income will cover loan payments, insurance and property taxes. Allow 20 percent for maintenance and vacancies. Remember that rents rise every year, while mortgage payments stay the same.
- You will need a down payment of at least 20 percent, and the interest rate will be 1/2 to 1 percent higher than on a home mortgage. (If you will live in a two-to-four unit, FHA will finance it as a single-family home with lower interest and a lower down payment.)
- As far as tax on rental income goes, the depreciation deduction will mean you won’t pay much. The property will be depreciated over 27.5 years.
- If you bought a fourplex for $400,000 and the improvement value is $275,000, you can deduct $10,000 annually ($275,000 divided by 27.5) from operating income before calculating taxable income ($275,000 is the value of the building; land can’t be depreciated).
Another factor to consider is whether you have the time to operate the property. You will have to arrange for repairs, or do them yourself, screen future tenants, and be available to handle emergencies.