Personal Financial Tips

Archive for the ‘Investment Property’ Category

Financing investment property is about obtaining a property for short and long term investment. Investors would either acquire a property to have it leased to generate revenue or have it renovated and sell it in a higher price.

There are three known approaches in financing investment property.

First is to use your own funds assuming that you have enough money to buy a property without any assistant from outside finance. This gives you an option of not having to go through a lot of paperwork and adhere to financing companies’ strict rules or having to discuss your every move to your partner in making decisions. You can do things freely but will be risky if you’re not being careful and will lead you to bankruptcy.

This second approach is the most common method in financing investment property wherein the investor should secure a line of credit from a local bank. This is for buying a property or payment for renovations. If you need a produce a regular income, you will be able to repay from the line of credit from the money that comes in every month. When you resell after making improvements and credit will be paid off at the time of the sale, they call it “flipping”. After it has been sold, you will find that you will have enough to do another flipping property venture.

Third strategy in financing investment property is to find one or more investors to help you with the finance. At least you will have someone to share all the expenses without having to release all your own resources. The taxes payment for renovations will be distributed at the same time you and your partner own the property. This is likely the most conventional way when having a commercial investment but this can also work with owning a residential property. If both partners have a positive working relationship, this is the easiest way in making money out of financing investment property.

All you need to have when deciding the best approach is the line of credit you have and the property you want to obtain. It is wise to understand the advantages and disadvantages when choosing from the three strategies in financing investment property, then use the one that would work best for your interest.

If you plan to purchase an investment property, you should consider getting a commercial property analysis before any real estate deal. Incomplete research can sink the deal on any real estate. You must understand everything about it before making the purchase.

Many individuals consider several factors when they get a property analysis. The location of the land is very important. Is the land in area that is appreciating? Are there other business property buildings around this place? Also, the price of the asset is very important. Are the taxes expensive? Are there any local government and zoning laws? Finally you should see if the investment property is a source of potential rental income.

All investors must realize that commercial real estate has different guidelines and regulations which must be followed different from residential real estate. You do not want to purchase investment commercial land to find out that you are not permitted to lease it to a specific type of business. You may also be prohibited from making certain improvements on your property which go against the zoning laws. As an investor, it is important to go to City Hall and educate yourself on the local governmental rules and regulations which will govern what you can do with the land. Make sure you are able to do all that you plan on the property in question. Taxes are very important to consider when you are conducting a commercial property analysis. Many local municipalities offer tax breaks or incentives for business property owners who fall under a certain business-type or industry. You may also be eligible for a tax reduction, if you meet the applied deadlines. If the region charges taxes on commercial real estate at a high rate, investors could be unpleasantly surprised…especially if they do not consider taxes in their commercial analysis.

Many lending companies participate in programs which fulfill a variety of different business and community needs. There are many issues lenders take into consideration which influence whether a loan can be granted. Such issues include zoning requirements or economic make-up of the community. Commercial property analysis professionals can evaluate many factors that can help you decide whether or not to pursue a loan for that particular site.

Since your time is very expensive, you should be efficient when contacting your sellers, lenders or brokers concerning a site. Evaluating analysis information can be time consuming, but may cost you the deal if the investigation is not done thoroughly.

Securing the appropriate documents and information for your commercial venture can be hard for you to accomplish on your own. This is one of the reasons why you may want to hire a professional. This person can allow you to maximize your time. You should be able to focus on generating profits from your investments. You should have your commercial land analysis conducted by a professional; consider employing a broker or using investment property software to help you get that commercial real estate you have always wanted.

Are you interested in learning how to buy investment property successfully? This article will give you 5 top tips that will help you succeed and make money from your property investments.

Let’s get stuck straight into these tips.

1. Do your research. If you are buying a property in the hope of becoming a landlord then make sure you have checked the areas rental potential and make sure the types of properties that you are planning on buying are the ones in demand by tenants. If you are planning on flipping the property, make sure you buy a property that is wanted by homebuyers.

2. Don’t’ blindly trust what anyone says. This includes so called experts. Talk to a few different property professionals to try and get a balanced view on things such as:

- What type of property to invest in

- What location

- What type of tenant to aim for

Sometimes it is only after canvassing lots of different opinions that you can really formulate you own strategy with confidence and with solid reasons why you plan to do what you plan to do.

3. Get for comparables for everything. Rental comparables, sales comparables – everything you can. Make sure your comparables are as much like for like as possible. For example: if you want to rent out a two bedroom flat next to a railway station, then try to get the rental comparison of other two bedroom flats next to the same railway station.

If you use a two bedroom flat that is

Property investment finance is the one of the first obstacles that the potential investor faces…the benefits and advantages of investing in property for wealth building purposes are quite obvious, and if no deposit lending including costs was freely available, naturally everyone would be an investor!

However this is the post Global Financial Crisis era, where banks who were happy to give you an umbrella when it was sunny are now taking it away when the rain starts to fall.

Loan to Valuation ratios (The ratio of the loan the lender is willing to advance against the value of the proposed property) have taken a step or two backwards….from the heady days of No Deposit, No LMI lending for investment purposes, we are now looking at restricted lending requiring at least 5% deposits plus costs.

Some of the big 5 lenders will require a 10% deposit if you are not a current client…the lenders mortgage insurers have also had an influence on credit criteria. The Lenders Mortgage Insurer (such as Genworth) is the insurer the banks turn to to cover the risk of higher LVR lending.

These premiums are paid for by the client as part of the costs, and are calculated on a sliding scale from an 80% LVR up to 95%, and can cost upwards of 3.5% of the purchase price.

It was the willingness of the Lenders Mortgage Insurers to insure the No Deposit loans that made them possible for the banks to offer, however they did have their own lending guidelines, and there have been occasions when a client breezed through the lending process with the bank only to have the application declined by the insurer!

In the current climate, the issues facing finance professionals is that the LMI providers require applicants to have at least 5% genuine savings, which means that an amount equal to 5% of the purchase price must have been accumulated by a natural saving process, and held in an account for at least 3 months. Some LMI providers now assess applications by the mysterious method of credit scoring…no one can tell the mortgage broker or client why an application has been declined, only that a complex algorithm has been applied to the applicant and the deal in general; if it fails to score highly enough, it is declined out of hand!

Property finance investment for the potential investor that holds some existing equity in an owner occupied property should be a little easier, but as always the lenders look at the main issues of any application; Deposit or Equity, previous credit conduct (no credit issues, proven ability to cope with existing debt levels), serviceability or available income to service the proposed debt, the suitability of the proposed security and so on.

In general, investors try to source Property investment finance from their existing lender, using the equity in the family home. This usually works, although if the portfolio gets larger there is a concern that one lender has all the properties wrapped up together, all cross secured against each other….taking a cautionary view, if something was ever to go wrong, the potential exists for the lender to take whatever action he saw fit to recover any outstanding funds…in other words, he will sell whatever asset is most attractive to him to recover debts.

Having multiple properties all secured against each other also severely complicates matters if you want to sell just the one property.

Another option would be to use a different lender that is willing to take a second mortgage against the family home equal to 20% plus costs of the new property…..in time, as the equity increases on the investment property, this mortgage can be released once the lender has adequate security..the only issue here is that there has to be enough equity in the family home so that the total of the lending across the two properties is not higher than 80% of the values. Once the lending goes over 80%, the loans must be mortgage insured, and at this point the mortgage insurers will not contemplate 2nd mortgage scenarios.

For the average person, property investment finance can be quite a daunting prospect; not only the issue of who to approach for the funding, it is also a question of how should the loans be structured. After all, this finance facility is for an income producing business, there are a number of aspects to be taken into account, not the least of which is the tax effectiveness and flexibility for future expansion and purchases.

A good method would be to talk to an experienced mortgage broker who has dealt with these kinds of facilities in the past….ask him about his past record in structuring and implementing property investment loans, and how does he propose to put the loan together and why. Only when you feel comfortable that he knows what he is doing should you proceed!

If you are interested in buying investment property, then you are probably interested in earning as much as you can from your investment. This article answers the question, “where is the best place to buy investment property?”

There are so many places that are touted as being the next property hot spot or the next big thing that is going to take the property World by storm, that it can be confusing for the property investor to diffuse all the junk from the real facts.

Over the last 5 years, places such as Bulgaria, Dubai and Romania have emerged as solid places to buy property, that have experienced good capital growth.

Some of the best bargains in recent years have come from countries that have not yet found economic stability. They have been in the middle of a transition or some other huge change. Many have seen governments overthrown or leaders die. Events such as these can often herald the start of a new era in the countries development.

India has been a solid place to invest for years and still continues to be so. If you are thinking about investing in Indian real estate, you will have to decide on whether to go for somewhere like Goa or Delhi, both have strengths and weaknesses. The only way you can make the decision is by being clear on what your goals are and why you want to invest in the first place.

Slovak, Poland, and Czech Republic and are also getting increasing interest from property investors; however, with many of the people from these countries choosing to move abroad you have to ask yourself whether buying there is a good long-term decision. If people continue to emigrate at the rate they have been, in 6 years time are you going to be having problems finding tenants?

If you are still wondering where the best place to buy investment property is then property in Morocco might be what you are looking for. This isn’t just because it is economically sound it is also because the king is actively investing, promoting and developing the country and he is actively seeking more investment from foreigners where as certain other countries discourage it.

Somewhere like Spain has lost some of its appeal, largely because of the price; however, Morocco is just a few miles away from Spain and enjoys the same type of weather and the prices of property are a fraction of what they are in Spain.

The one thing that is crucial to you deciding where to buy investment property is first to come up with reasons why you want to buy it, and to establish what your criteria for buying it will be; for example, is capital growth the most important thing or rental yield?

Without first finding the answers to these questions you might never really find the best place for you to buy property since what is someone else’s property hot spot, might not be a hot spot for you.

One of the true benefits of owning rental income property is that real estate investors can depreciate the property and enjoy the positive cash flow resulting from writing off the tax depreciation–just one of the tax shelter benefits associated with real estate investing.

Here’s how it works.

The tax code assumes that the investment property buildings (not the land) are wearing out over time and therefore becoming less valuable. As a result, they permit income property owners to take a deduction for that presumed decline through the depreciation deduction (or cost recovery as it’s now called in the tax code), which in turn helps the investor shelter rental income that is subject to ordinary income rates.

Let’s assume, for example, that you purchase a multifamily property for $500,000 of which $400,000 is attributable to the buildings (the remaining portion is land value). The IRS assumes a life of 27.5 years for residential property (39 years for non-residential property) and therefore allows real estate investors to take an annual depreciation deduction of about $14,544 ($400,000 / 27.5) except in the first year and selling year, which is slightly less ($13,940) due to what is termed the mid-month convention.

The boon for real estate investors, of course, is that the depreciation deduction is a non-cash deduction–it is not an operating expense, therefore you can take it without having to write a check for it as you would other costs associated with running the investment property. Moreover, if the depreciation deduction is large enough to exceed the property’s income, investors can use it to offset other investment income and therein reduce other tax liabilities as well.

Okay, that’s the good news.

On the flip side, because the depreciation taken reduces our investment property’s tax basis and effectively increases our tax gain when we later sell, if the property is later sold at a gain, the IRS assumes that our gain in part may have resulted from the depreciation we took and in turn imposes a recapture tax on the gain attributable to depreciation taken (imposed at 25% in the Taxpayer Relief Act of 1997, but subject to change so always consult your tax adviser).

Okay, let’s look back on our previous example and assume that you sell your multifamily property at a gain greater than your accumulated tax depreciation (which we’ll say is $144,232). Since your gain is greater than your tax depreciation, the recapture rule will apply.