Before buying a rental property, you should thoroughly research. So, here are five reasons that will tell you why you should or should not invest in a specific kind of home.
Cash flow is the difference between debt servicing, your tax payments, mortgage, and insurance, out of which the collection of your rent is subtracted. The potential for cash flow in a property is one of the primary factors to look at when investing in it.
Usually, new investors make it the entire point of purchase. Although considering the cash flow of a property is a good thing to do, it is not always necessary to do it right away. In any case, it is essential to factor in cash flow before deciding whether or not it is worth it to make the investment purchase.
Equity capture is again a vital aspect to take into consideration when you are assessing a potential investment. There is a market value of the property, and then there is the value at which you ultimately buy the house. For instance, the market value of a property is $100,000, but you get a deal for $80,000, you have gained an equity capture of $20,000. This does not mean that these $20,000 are your own and go into your pocket. It means that you have an unrealized capital gain, and it counts as money you have in your property.
Equity capture tells you if your investment strategy was right or not.
Debt paydown is when the rent coming from your rental property starts going towards your mortgage. This means that your tenant's monthly payment is paying off your mortgage. For example, if you have owned a house for almost 30 years and it has been on rent for this whole duration, the resident will be paying the cost of the property.
Therefore, when you invest in a rental property, there is a high chance that you will enjoy the benefit of debt paydown.
Depreciation is another factor to consider before investing in a rental property. This is because the government does allow you to depreciate your rental property. However, the government has kept it at 27.5 years, creating a set standard. To understand this better, you should talk to a professional bookkeeper and see what you can do to depreciate your property in a way that is both legal and effective.
Investors call this phenomenon a phantom loss because it offsets rental income earned on your property. It also much helps with tax liability, and so it should be a contributing factor before you make a decision.
Before investing in a property, the biggest driver of your decision should be based on whether or not the property will increased value over time. If we look at a little bit of history, the property values almost double every 7 to 9 years on the East and West Coast. In Midwest, on the other hand, it doubles every 12 to 15 years.
Hence, if you plan on buying a property in the middle of the US, the property should at least appreciate twice in 30 years. And if you’re thinking of making a long-term investment, this factor is crucial to consider.
