Don’t be Spooked by Investment Properties!

Dear Sue,

Your recent articles about today’s great buying opportunities have inspired me.

My grandmother passed away and left me a nice inheritance. This may be the only time I have a chunk of money to put down on a property. Until now I have been a renter.

You said in last weeks article that rental property was a good investment. Would it be a good idea to buy a duplex? I was thinking about living in one side and renting out the other or should I just buy a house and avoid the tenant hassle altogether?

The whole idea sounds scary but I think I am ready. Where should I start?

Inspired Ed

Dear Ed,

The first thing I will tell you is to get a good real estate agent experienced in investment properties.

I think that buying a multi-unit property can be very profitable. Multiple units are a great addition to any real estate portfolio. Before you buy, several factors must be taken into consideration. Financing options, cash flow and tax considerations, the property’s location and condition, and one’s knowledge of property management must be evaluated.

A single family home, duplex, tri-plex and four-plex have the most favorable financing terms. Five or more units will require commercial financing. The interest rate on a commercial loan is generally higher and the term of the loan is usually shorter. A reputable mortgage broker can offer a variety of financing plans. Keep in mind that the lower the cost of the loan including the interest rate, the better the return on the investment.

Below market rents in a well-maintained and well-located building can be a real find. The return on ones investment can be improved immediately by simply raising the rents to fair market value. Be careful not to lose your tenants. You may choose to increase the rents gradually by adding periodic rent increases to the rental agreements.

The federal government will help pay for your multi-unit property investment through various write offs. A significant one being depreciation. The government will let you depreciate or write off 1/30 of the property’s value, excluding land, each year for 30 years. When the property is sold, the capital gains tax rate is a low 15%. You may defer taxes completely by doing a 1031 tax deferred exchange into another investment property. I highly recommend doing your tax planning with a qualified CPA and/or tax attorney.

Location, location and location has the biggest impact on present and future value. A comparable property in Laguna Beach or Stockton? Enough said.

The property’s condition is important to consider. Repair and maintenance costs will negatively impact the bottom line. If you have the ability to do the repairs yourself and not incur expensive labor costs, it’s possible to get a better deal on a poorly maintained building.

Good property and tenant management skills are crucial. One lawsuit can wipe out a landlord! Educate yourself with books, seminars, classes and newsletters. Have a good real estate attorney guide you through the process. Education is well worth the investment!

Your idea is fantastic and a matter of good home dollars and sense.