They make up a big portion of the portfolios of some of the most successful investors that anyone will know. If you’re up for a long-term commitment, then getting into property can be a great way to build your net worth or even to get a very valuable income stream set up. But there are a lot of issues that could get in the way of making the kind of profit you’re expecting to. Here, we’re going to identify a number of those problems and the kind of choices you should be making.
Figure which way you should take that investment
It’s also worth doing your research to see how exactly you should hope to see returns on your property. The two options most readily available are trying to build a profit or supplementing your income through letting. Otherwise, you’re looking to sell a home for a greater amount than you bought it. So, you want to look into the data of whether buying or renting in an area is more expensive, for one. For areas with larger rental cost, you’ll want to go the ‘to let’ route. If people in the area are willing to spend more buying than renting, then you sell it.
Identifying the cores of a profitable area
Naturally, the potential profit made from a property depends on more than just how you’re going to seek returns on the investment. It’s a good idea to have a checklist of some of the signifiers of a well-developed neighborhood. You’re thinking about the kind of things that people expect and want from living in a good area. Proximity to universities, schools, hospitals, transport centers and retail hubs are some great examples. For different demographics of buyers and tenants, that will differ. Families will care more about whether a school is in good distance, while college students will obviously look for proximity to their place of education. Make sure you align the demographics you target with the most valuable aspects of the area.
Keep an open mind
You can do even better than keeping an eye for the signs of a good neighborhood. Smart investors keep their eyes on areas with the best prospects. For instance, some investors might overlook low-income areas, but they can be one of the most active hot beds for serious returns on investment. Take a closer look at the area and see if there are any infrastructural or construction projects in the area. Catching a property in an area that is showing signs of real development could see the value of your property jump up a lot quicker than you think. That’s not to say that you should roll the dice on low-income areas where you haven’t yet seen any signs of that kind of improvement.
Don’t miss anything in the budget
One of the mistakes that stop quite a few novice property investors from making the kind of money they should is failing to take into account the real return they can expect. Individual investors should hope to aim for at least 10% in gains from any property investment. But failing to consider factors like maintenance (which can account for 1% of property value annually) is only the start of it. You need to make sure you account for all those hidden costs.
Avoiding those money pits
If you fail to account for the bigger fixes that a ‘fixer-upper’ can bring with it, you can really get surprised by how much your supposed investment is eating into your finances. There are some aspects of improving a home that can prove profitable. However, if there are expensive fixes need for things like the furnace, the window, or the roof, you might need to reconsider. You could contact those service providers to get quotes on how much you could expect those problems to cost you. That’s why it’s important to have a thorough investigation of a home and take pictures to show contractors before you agree to any price. Until you have a good relationship with reliable contractors, you could be looking at severely cutting into your losses by buying a ‘fixer-upper’.
Keep all the money
There’s a big downside to buying to sell that many might think there’s no way around. You might have worked hard to improve the value of a property, but you might not get the full benefit of that work. On any gains made on the property, you’re liable to lose from 25 to 30% and even more through federal taxes, state taxes, and depreciation recapture. That’s a huge amount that could make your investment a lot worse for the amount of time on it. But there are legal ways to make sure you get a better deal. You can maximize your profit by operating with NNN investing to increase better fixed rate income, then using a 1031 exchange when it’s time to sell. That can allow you to take the whole gains from the investment and put them into another property, deferring the tax and keeping 100% of the profit working for you. You need to find a suitable replacement property, but it can be a great way to keep the investment returns growing until you’re in a much more favorable position to cash out.
Be a smarter landlord
If you’re choosing to let your property, then you might be tempted to get hands off and let it work as a passive form of income and investment return. It’s not all that uncommon to make that choice, but it can end up less profitable for you. If you have no influence on things like vacancy and tenant vetting, you’re likely to lose more money through an empty house you’re paying for and unreliable choices. It’s a good idea to get a property management company on your side, but you should never distance yourself too far from your own assets.
Be smart about the property you buy and what gives it the kind of value you expect it to have. Be realistic and informed on how much the costs will affect the profit. Then get hands-on in finding the best ways to maximize the profit.
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