Fences & Flowers

The CB Bain Blog

Six Things To Know When Buying Investment Properties

Feb 26, 2013

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Investment Property

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When the market was on the uptick, it seemed like everybody was an investor in real estate. Folks were able to buy with no money with the concept of flipping and buy multiple homes for future investments.

Well, those days are far and few. There are success stories but there are also stories of folks losing everything due to bad advice or just not doing their home work. Things have changed in today’s market and here are a few things you may need to know prior to investing in today’s market with its challenges.
 

 

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  1. You need cash on hand. Most banks will require a minimum of 25% down for any investment properties. The days of borrowing money for no money is gone. With the stringent requirements by the banks, having large reserves is almost a must in today’s market.
     
  2. When you are purchasing an investment, and need a loan, expect the bank to count any and all debt of other mortgages. If you currently own a home with a mortgage, the bank will count the debt of your current mortgage toward the debt of the investment property toward your total debt ratio. It would not matter if you have a tenant in place for the property, the bank will not count it as income until it has seasoned for two years on your taxes.
     
  3. The rates for investment properties are usually a percentage or more higher then the standard rates you see when purchasing a primary home. This could affect any monthly profits if you don’t pick the right property.
     
  4. Banks may require you to have property management or rental experience if you are purchasing a rental investment for the first time. They want to make sure that you can handle the assets you are borrowing the money for.
     
  5. When you look to sell the properties, don’t forget the standard closing costs and fees that are included in a sale of a home. This could eat into any profit margins if it was not taken into account. Between the commissions, taxes, title and escrow you can run a minimum of 8% off your bottom line. This is the number that most new investors don’t think about when purchasing to flip a home.
     
  6. The tax laws and capital gains laws are in the process of changing for 2013. In the past, for most people there was a 15% capital gains tax on investment properties. The difference between the amount you sell it for and what you paid for is a capital gain or a capital loss. If the property is sold prior to one year then it would fall under your income tax bracket.

Investing in real estate can be a positive thing, and if you have the means to do so, I say move forward.

Work and interview a Realtor who understands the investment side of residential properties since most agents do not focus on such products. Do your homework and understanding the loan process by asking a qualified mortgage broker. Contact a qualified tax accountant about the changing laws and the impact of owning more then one property.

Overall, Real estate is a driving force in our economy and is a great way to expand your portfolio with the right people. If you have any insights, please share by commenting below.

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