For all of us out there who can’t stand the relentless and boring hours of playing Monopoly, we do understand that the game is undeniably simple. Control the board by purchasing real estate, and over time other players will continue to pay “rent” until you are victorious. When applied to real life property investment, the rules of the game change (you now need to borrow money from the bank, not just steal it when no-one is looking), but some of the basic principles always stay the same. Below are three key focus areas to consider before making the jump into a lucrative property investment.
- Vacancy Rate – The single most important factor when evaluating an investment property is the current or projected vacancy rate. An owner of Boardwalk or Park Place expects to get paid rent when someone lands on their property, right? Well if no-one is living there or your tenants are bankrupt it’s not going to happen, period. By securing a property with a strong rental history or rental projection your bottom line will reflect a strong cash flow from having the property occupied every month.
- Property Management – Many of us are looking for a great alternative investment to the stock market, but don’t have the time to actively manage a rental property. Factoring in property management expenses is crucial to accurately projecting the net income from your investment. Although there is no set rule, property managers generally charge around 10% of rent to manage the property. If you have a little extra time and the ambition, managing the property yourself can be a great way to increase your cash flow every month.
- Tax Considerations – Although you don’t need to be an expert in tax law it is always good to know some of the basics. Mortgage interest, depreciation, and general maintenance expenses are all examples of write-offs than can help lower your tax bill. In essence these will help reduce or eliminate that pesky “income tax” from your investment. I always recommend consulting with a tax advisor at least once a year as they can help you file in the most tax effective manner.
Recently, financial services firm Morgan Stanley named real estate as the “best alternative asset investment” with interest rates at all-time lows. For more information on how to evaluate and pursue an investment property purchase just reach out to our dedicated Full Circle Team, we are here to help!