For many, home ownership is the pinnacle of adult achievement. It signifies that you’re successful in your career and that you can adequately provide for your family. Owning a home also affords you more freedom than renting, and you can tailor the space to suit your interests and taste in design.
While there are numerous benefits to home ownership, the reality is that buying real estate, from your own home to an investment or commercial property, can be risky. However, today’s real estate market has bounced back significantly from the low point that followed the housing market crash of 2007. What’s more, real estate builds wealth more consistently when compared to other asset classes.
But you should do your research and know what you’re in for before diving into real estate investment. Whether you’re considering purchasing a home for your family or want to grow your wealth, you likely want to protect your investment over the long term. Fortunately, there are many things you can do to prepare for disaster and safeguard your investment.
Know Your Terminology and Tax Laws
When you’re looking to move up in the world from renter to homeowner, there are many factors that you must take into account. The first consideration, of course, is financial. Can you afford a down payment on a property? If so, how much?
Purchasing a home may require a significant down payment of anywhere between 3.5% to 20% of the home’s cost, which is why many choose to rent rather than purchase a home. The exact number will depend on the home’s condition and location, as well as your credit score and other factors. While it is possible to become a real estate investor with no capital of your own, the process isn’t easy.
In order to determine if home ownership is financially feasible, you should calculate your estimated monthly and yearly expenses. Keep in mind that, as a homeowner, you’ll be responsible for everything from replacing damaged appliances and electrical fixtures to making structural changes as needed. You will also be responsible for paying property taxes, which can vary depending on the location of your home and the assessed value of the property. In 2017, the nationwide property tax average was $3,296, and the highest property tax rates were found in counties within New York, California, and Connecticut.
High tax rates are enough to scare anyone away from home ownership, but the news isn’t all bad, especially in the realm of real estate investment. If you’re investing in a property that you don’t plan on living in, you may be able to write off wear and tear when filing taxes.
In regards to a rental property, it’s in your best interest to take every legal deduction possible, including depreciation, at a rate 1/27.5 of the property’s value against the income you’ve generated. The depreciation deduction can help offset the numerous expenses that accompany real estate, such as insurance, mortgage payments, maintenance, and property management fees. Ideally, your goal when investing in real estate is to bring in more money in rent than you pay out in expenses, resulting in positive cash flow.
Don’t Overlook Property Maintenance
One of the primary reasons that would-be investors, especially those under 35 years old, elect to rent instead of buy a home is due to property maintenance considerations. By not keeping up with the maintenance needs of an investment property, you could end up watching your life savings crumble away. Always keep in mind that many potential maintenance money pits are apparent prior to signing a purchase agreement. For that reason, it’s imperative that you do due diligence and hire a qualified home inspector before purchasing any real estate.
Quality, trustworthy home inspectors will ensure that a property has undergone pest, mold, and lead inspections. He or she will be well-versed in local building codes and will peruse home disclosure documents to determine when upgrades were done and which areas of the house might need extra attention during the inspection process. If you want to accompany the home inspector during the process, feel free to do so. They can answer any questions you have about potential problems.
Once you determine that a particular property is the right investment choice, it’s your turn to keep it in good shape, as ignoring or procrastinating on repairs can lead to costs that quickly spiral out of control. Diligent property owners should fix issues right away and maintain existing systems and components, especially HVAC systems, appliances, and the roof. Replace AC and furnace air filters at least every three months to improve HVAC system longevity, and inspect seams and cracks in your property’s ceiling to ensure that it’s just regular wear and tear — and not a more serious issue.
Plan Ahead and Think Outside the Box
Once you have taken the plunge into the exciting world of real estate investment, there’s much more than taxes, property maintenance, and cash flow to consider. You also need to prepare for the unexpected and draw up an asset plan in case something happens to you. In order to protect your investment for your family in the event of your death, you should create a comprehensive estate plan that provides detailed, clear instructions.
Estate planning typically requires the assistance of a legal professional who understands your wishes and is well-versed in estate law matters. Depending on the type of assets you have and their estimated value, they may suggest that you place those assets in a trust. No matter the details of your estate plan, however, it’s extremely important that your will and other documents reflect your current life situation. If your plans or family situation change, make sure to update your estate planning documents accordingly in a timely fashion.
Investing in real estate can help you make your mark on the world, grow your wealth, and ensure your family’s security into the future. Prior to putting money down on a piece of property, make sure you know the basics of the process and enlist outside help as needed. Professionals such as home inspectors, insurance agents, and lawyers with a background in estate planning can serve as lucrative advisors and allies during your real estate investment journey, no matter the geographic location of your investment property.