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The Potential Pitfalls of Buying a Second Home for Income

May 11, 2021 by Clean N Dry Today

The Potential Pitfalls of Buying a Second Home for IncomeAside from owning a business, owning rental property has been one of the top investment choices for people, most commonly done through buying a second home. Handled right, income properties can generate significant gains for investors, both in terms of real estate appreciation as well as monthly income from tenants. However, it’s not sure a surefire approach to financial success. There are a lot of ways that a budding real estate investor can go sideways with an investment property home purchase as well.

Watch Out for the Seller-Renter

Many times people will sell a home but then offer to rent it from the buyer, essentially trading their home title for ready cash but not really moving out. These situations come up a lot where someone wants to stay where they are but doesn’t want to deal with a mortgage anymore and would rather rent. They are also frequently listed as buyer-direct home sales versus using a traditional route through a real estate agent and broker. The big risk here is that the seller is able to unload the home on the buyer, and then stop paying the rent a few months in. The deal allows them to avoid foreclosure but then it becomes the landlord’s problem to actually evict. By the time the legalities are done and eviction is finally achieved, many landlords have taken a loss on the property and end up selling again. It’s better to have a clean sale with no further obligation between the parties and start with brand-new renters altogether.

Have a Good Strategy Ahead of Time

There are different ways to make a net profit from a rental property. Depending on the cost of financing, down payment and expectations of holding a residential property the driver for profit can be different. Some expect to make a gain both from rental income as well as equity growth. Some realize with the cost of financing, the better plan is to use rental income to pay for the mortgage as much as possible and make the net gain on the property equity appreciation over time. How long a property will be held can come into play as well. Knowing going in what one’s strategy is can help avoid mistakes once a commitment has been made or being surprised if the market has a downturn etc.

Tax Benefits are Different

An income property doesn’t get the tax same deduction benefits of a first home. The mortgage interest deduction, one of the biggest tax benefits possible for an individual is not possible with a rental income property. However, if you are operating your rental property purchased as a business, many of the expenses of running that business can be deducted through the Schedule C form process with an income tax return. Check with a tax advisor or attorney to be sure for your specific situation and interests.

Owner Responsibilities

Just because you rent the property doesn’t mean you’re off the hook. As a new buyer and owner, you’re still responsible for the property taxes due, HOA assessments, utilities and other costs tied to the property. Unless you contractually make the renter responsible, the tax, HOA and utilities will address the property in your name as the owner. Some forget this fact and get a nasty surprise in the mail with a tax or assessment lien on their property.

In short, buying a second home as an income property has the potential for significant investment gain, but it doesn’t operate on auto-drive. You need to still be involved quite a bit and watch whom you rent to when protecting your property interest.

Filed Under: Real Estate Tips Tagged With: Investment Property, Real Estate Tips, Tax Benefit

How to Buy An Investment Property

February 25, 2020 by Clean N Dry Today

How to Buy An Investment PropertyIt is important for everyone to take steps to diversify their assets. While many people take this to mean holding multiple stocks, bonds, and mutual funds in the market, this also includes branching out into the real estate industry. The real estate industry is far more stable than the stock market and provides a fantastic opportunity to generate reliable returns. At the same time, there are lots of options to choose from when it comes to investment properties.

Here are a few tips everyone should keep in mind.

Buying And Renting

One option is to purchase a single-family home as a second building and then rent it out. On the other hand, it is also possible to purchase a multi-unit property and rent out each individual unit. One of the biggest factors to keep in mind is that the owner is going to be responsible for collecting deposits, checking the backgrounds of potential tenants, conducting repairs, and completing maintenance tasks. 

If the property is located in a desirable area, it is possible for someone to collect enough rent to cover the cost of the mortgage and more. At the same time, it is also possible that someone might end up spending a considerable amount of time managing the property. It might be a solid idea to hire a property management company; however, this will eat away at the revenue. These are a few of the key factors to think about.

Flipping Houses

Another option real estate investors can consider is flipping houses. In this process, someone buys a home (which is often in a state of disrepair and inexpensive), repairs it, and then sells the home for a profit. It is also possible that someone might end up spending a significant amount of time and money renovating the home, which might eat away at any financial gains. Be sure to know exactly what repairs and renovations the home is going to need before buying.

A Real Estate Investment Trust

Sometimes, it might be too much for someone to buy individual properties. One possible option is called a real estate investment trust (REIT). This is a company that owns numerous big properties that generate incomes. Therefore, these trusts are often compared to mutual funds in the stock market but for real estate. Different REITs specialize in different areas, so there are lots to choose from.

If you are interested in buying a new home or purchasing an investment property, be sure to consult with your trusted real estate professional.

Filed Under: Real Estate Tagged With: Investment Property, Market Trends, Real Estate

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