Real Estate As An Investment FAQs
1. Is buying a vacation home a good investment?
Not only is owning a vacation home enjoyable, but it can also be a great investment. When you’re not staying in the home, you may be able rent it out to vacationers for a significant profit.
There are also tax advantages to owning a second a home. Both interest and property taxes on a second home are tax deductible. However, you must stay in your vacation home for a certain number of days for the IRS to consider it a second home. If you use your second home as a vacation rental and a second home, you’ll have to spend at least 14 days a year in the home or 10 percent of the time it was rented—whichever length is greater. If you do not spend any time in your vacation home for a year, the IRS will consider it a rental property if you rent it or an investment property if you leave it empty. In that case, it will not qualify as a second home for the purpose of the home mortgage interest deduction.
Additionally, some people buy vacation homes in hopes of making it their permanent residence after they retire. This could be a wise investment considering that a waterfront home that costs $500,000 today could run upwards of $2 million 10 to 15 years from now.
Of course, owning two homes can also be extremely expensive, considering that you have to make two monthly mortgage payments, pay two sets of property taxes and cover utilities and maintenance costs for both homes. Therefore, it’s important to do your homework and ensure that a vacation home fits into your overall budget.
2. Is a condo a good real estate investment?
In recent years, condominiums have often proven to be just as profitable of an investment as single- family homes. In some parts of the nation, condos can even be more profitable than single-family homes. Some experts say the nation’s changing demographics, including increasing numbers of empty nesters and first-time property buyers in high-priced markets, have caused condos to skyrocket in popularity.
However, single family homes are still the preferred investment for many home buyers. While condos can be a great investment and good way to build equity, you have to remember that you are purchasing a property that is part of a building you do not own. While you are responsible for maintenance and repairs on the inside of your condo, the maintenance and repairs for the outside of the building and surrounding grounds are handled by the governing association. That means, when it comes to the overall appearance and value of the condo, you are often at the mercy of the association. Plus, condominium associations often charge sky-high monthly fees, running as much as $150 a month or more.
However, every town is different, so it’s important to do research on the specific market where you plan to buy.
3. Should I buy a one-bedroom condo as an investment?
It depends on your specific market. If you are buying in an expensive market with many single home buyers, such as Manhattan or San Francisco, a one-bedroom condos could be a great investment. However in most markets, a condo with two or more bedrooms is a much smarter investment. Talk to a real estate professional to find out what sells in your specific area.
4. How much rent should I charge?
If you are renting out a property for the first time, it can be challenging to figure out how much to charge for rent. It’s important to do your homework and find out what other renters in your area are charging for comparable homes.
When you apply for a loan to buy a rental income property, your lender will require you to have an area rent survey completed by a certified appraiser. The appraiser will consider factors like what the property has rented for in the past, the condition of the building, the location and the current housing market. The resulting rent survey will help you determine how much rent you should charge.
5. What is a lease option?
A lease option is a contract a renter signs that gives him or her the option to purchase the rental property within a specified amount of time. With most lease options, a portion of the rent is applied to the future down payment on the property. These contracts are extremely popular with buyers who do not have enough money saved up for a down payment and closing costs.
Lease options offer many advantages for sellers, especially in a slow real estate market. First of all, lease options typically include a higher monthly rent. Additionally, they offer top-market value for the property and tax-free use until the lease option expires or the renter purchases the property.
If you are considering setting up a lease option, talk to a real estate professional or a real estate attorney. There are also many books and articles dedicated to the topic of lease options.
6. How do I know if a real estate investment program is a scam?
You’ve probably seen countless real estate investment ads that make lofty promises of quick and easy riches for any investor. However, there’s really no such thing as a get-rich-quick real estate investment. Investing in real estate takes a great deal of skill, know-how and hard work.
So, if you see an ad for a get-rich-quick real estate investment, it’s probably a scam. Many of these programs want you to give them money up front—which is usually a bad sign. Others simply offer advice on how to buy government foreclosure properties. However, you can find most of this information for free by doing online research or calling government offices directly.
In other words, if a real estate investment sounds too good to be true, it probably is.
7. How can I find a good fixer-upper or distressed property?
Depending on where they are located, distressed properties or fixer-uppers are often great real estate investments. You can find these kind of properties in almost any community, including wealthier neighborhoods.
The key is to find a home in a desirable area that does not require a ton of work. Ideally, you should try to find what’s known as a “cosmetic fixer-upper.” This is a fixer that needs just a little cosmetic work, such as new paint, flooring, fixtures, appliances and landscaping—as opposed to major structural repairs.
If you’re looking to buy a distressed property or fixer, find out what area homes are worth and how much they typically sell for in the current market. Do some careful calculations to figure out if a home is worth the time and money it will take to fix it up and put in the market. If it looks like you’ll lose money in the end, it’s time to look elsewhere.
8. What does it take to successfully flip a house?
Before you dive into the house-flipping business, you need to do a lot of research and some serious soul-searching. Some people just aren’t meant to be house-flippers. Here are a few questions you should ask yourself:
- Do I have the time to dedicate to a house-flipping project? (Many people have to quit their day job to flip houses because it’s so time-intensive.)
- Do I have the money to purchase a home and invest in expensive renovations?
- If I lose money in the deal, will I be able to bounce back or would it spell financial ruin for me?
If you decide the house-flipping business is for you, the first step is purchasing the ideal property. Find out what the market is like in the area, including the average home price and how long houses typically stay on the market. If homes aren’t selling at all in the area, you should probably look elsewhere. Work with a professional realtor who specializes in the area and get his or her opinion about the property and your planned renovations.
Before you even buy a house, make a detailed list of what improvements would need to be made. Then, obtain specific estimates on how much the work will cost. When it comes to flipping houses, it’s always wise to cushion your estimates. Most house flippers end up going over budget, so leave plenty of room for surprises and setbacks.
As you calculate your budget, factor in mortgage payments, property taxes and utility bills. Remember, the longer it takes you to renovate and sell the house, the longer you’ll be stuck paying the mortgage.
Once you purchase a home, you’ll have many long days of hard work ahead of you. As you make renovation decisions, remember to give the home a look that has mass appeal. Curb appeal, interior design and home staging strategies can make all the difference in the world. If your property offers features that other homes in the area don’t (such as granite countertops and stainless steel kitchen appliances), you’ll be more likely sell the home quickly.
9. Is a foreclosure home a good investment?
A foreclosure is a home that has been repossessed by the lender because the owners could no longer afford to pay the mortgage. Thousands of homes end up in foreclosure each year, and these properties can be a good investment—if you know what you’re doing. There are countless foreclosure pros out there who know exactly what they’re doing. So, if you’re a newbie to the foreclosure world, you may find that the competition is fierce.
There are many risks involved with buying a foreclosure, so it’s important to do your homework before you buy one. If you have never bought a foreclosure before, you should hire a realtor or another expert who specializes in foreclosed properties to guide you through the process.
10. How can I determine the value of a foreclosure property?
Typically, you have to buy a foreclosure “as is,” which means there is no warranty on the condition of the property. If you find serious issues with the home, you cannot request repairs from the seller. That’s why it’s important to determine the value of the home before you buy it.
You can do this by asking the lender to provide as much information as possible, including the range of bids he or she expects to receive on the home. You should also take a close look at the property, if possible. If you cannot get onto the property to examine it, ask nearby neighbors if they can tell you about the condition of the home.
You should also some research on comparable properties in the area. You realtor can help you find this information.