There’s a big difference between owning your own home to live in and owning an investment property. An investment property is a real estate asset you use only for investment purposes. You must occupy a property for at least 14 days or 10% of all the days the property is rented to call it a residence. If you occupy it less, you’ll need to claim it as an investment property on your tax returns, according to the IRS.
An investment property is also not a fix and flip, which is when you buy a property, renovate it and hope to sell it for a premium. These projects can be profitable. You hold them for a shorter time than you would an investment property. An investment property is held with the goal of receiving rental payments and long-term appreciation.
Take a look at why investment properties are a worthwhile venture and how you can get started.
Rewards of Investment Properties
Investment properties offer a host of unique benefits. They’re great sources of:
- Passive real estate investments: You’ll still have to put in the effort to find tenants and take care of any necessary repairs or renovations. But once everything is taken care of, you can sit back and count on a steady cash flow coming in every month. You’ll also have the benefit of capital appreciation or when your property increases in value over time. These factors are what makes investment properties appealing assets to own.
- Diversification: Investment properties are a great way to diversify your portfolio, particularly if you’re currently invested in stocks, bonds, ETFs and more.
- Tax benefits: You need to report rental payments as income on your tax return. You also need to report capital gains to the IRS if you sell an investment property for more than the price you paid. That said, property owners are able to deduct various expenses from their tax returns. This includes mortgage interest, repair costs, physical wear and tear and the cost of finding tenants. Make sure to consult with a tax professional for all the details.
Risks of Investment Properties
Every investment comes with a different degree of risk. Investment properties aren’t immune to this rule. To own a successful investment property, you’re going to have to prepare for the risks. These include:
- Lack of liquidity: Real estate is not the most liquid asset to invest in. In an emergency, you can sell stocks or bonds and receive cash in return pretty quickly. Real estate takes longer to sell. In some cases, properties can sit on the market for weeks or months. Be prepared for your investment to be “locked up.”
- Learning curve: The most successful investment properties are born out of years of expertise. It takes time to learn about the market and to find the best business model. Knowing how to spot an up-and-coming neighborhood, which maintenance tasks to outsource and which contractor to trust can take a while to learn.
- Landlord responsibilities: Being a landlord requires extra effort. It can be time-consuming and even strenuous for some people. Landlords have to find tenants and screen them thoroughly. Some tenants may not pay rent on time or even harm your property. You’ll be responsible for any maintenance work tenants may need. While you can hire a property manager to help out with basic tasks, it will come at a cost. You’ll need to figure out the best way to maximize your time and expenses.
- Management fees: This risk is unique to crowdfunding real estate investment platforms and REITs. Some platforms can charge high management fees or other types of fees. It’s a good idea to have a chat with a platform advisor to ask questions before you invest. Be sure to ask about fees!
- Returns are not guaranteed: With any investment, there’s no way to know for sure when your investment will pay off and how impressive the returns will be. This is especially true for crowdfunding real estate investment platforms. Although many advertise average returns, these are never a guarantee for future returns. There’s a chance the platform’s investments could fail. Make sure you understand how your money will be protected even during a worst-case scenario.
When to Invest in Property
Investment properties used to have high barriers to entry. You needed to have a lot of capital on hand to enter the market. This isn’t the case anymore. Whether you’re a recent college graduate or a retired professional, you can take advantage of real estate investing now.
Technology and regulations have made it easier for everyone to get involved.
Many online platforms pool your money together with other investors. This is called crowdfunding. Many crowdfunding platforms let you begin investing for as little as $1,000 or even less.
Best Platforms for Investing in Property
The rise of online platforms has made real estate investing more accessible than ever before. Here are some of Benzinga’s favorites.
DiversyFund is a crowdfunding real estate investment platform that operates its own real estate investment trust, the DiversyFund Growth REIT. When you create an account with DiversyFund, you can start investing in its REIT for as little as $500. There are no platform fees. You can also invest in DiversyFund itself (for accredited investors with a minimum of $25,000).
DiversyFund invests in real estate that can be sold within approximately 5 years. The company maintains several cash-flowing properties in the portfolio and generates rent revenue. When the market turns advantageous, Diversyfund sells the asset and you receive your principal back — plus returns. In 2018, investors saw average annualized returns of 17.3%.
CrowdStreet Marketplace is a platform that connects investors with real estate opportunities. CrowdStreet allows investors to get in on real estate deals directly, which maximizes the potential for returns.
Investors can also invest in funds or seek out advisory services. The platform has a steep minimum of $25,000. (The majority of offerings on the CrowdStreet Marketplace have a minimum of $25,000, though some may range up to $100,000.)
Create an account to begin browsing real estate deals and begin investing.
Roofstock is an online marketplace for single-family investment properties. Investors can buy and sell properties, portfolios and even shares of rental properties in a single place. There is a one-time management fee of 0.05% when you do a transaction.
To get started, you’ll need to create an account and apply to be preapproved with a lender. Once you’ve been preapproved, you can start investing by bidding on properties or offering the list price. You also have the option to buy shares of rental homes. Shares require an investment minimum of only $5,000.
Streitwise offers an online commercial real estate investment trust (REIT) platform. Streitwise manages its own private portfolio of real estate assets. Investors can invest in the managed portfolio through the online platform. You can get started for as little as $1,000 and expect to receive a dividend target of 8% to 9% for 2020.
There’s a one-time fee of 3% when you first invest and then you can expect to be charged 2% every year afterward.
Get the Right Investment Property
Taking out a mortgage for your investment property is not the same as taking out a mortgage for a home you plan to live in year-round. You should expect to put down a larger down payment and be charged higher interest rates. Oftentimes, the approval requirements will also be different. You will need to consult with your mortgage provider to get all the details.
It can be a bit difficult to secure financing for an investment property. This is one of the reasons why REITs and real estate investment platforms can be a great resource. Whether you choose to buy an investment property yourself or invest with an online platform, real estate is a worthwhile investment that can bring solid gains and diversify your portfolio.
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