Best Properties for Investment
Point of Interest
Investing in property isn’t just about buying the asset at a good price and keeping operating costs low. You also need to find the right property so that the search for the tenants is quick and easy.
While investing in property can boost your long-term wealth, getting into the investment property game can be daunting. You’ll have to make many decisions, and two of the most important are the location in which you purchase the property along with the property itself.
Get those two factors wrong and you’ll face an uphill battle when trying to achieve your financial goals. You should always consider what to look out for when searching for your ideal piece of investment real estate.
Why invest in property?
Why should you invest in property when there are plenty of other ways to make money? Well, there are a ton of compelling reasons why property remains the investment vehicle of choice for many investors, including:
- Passive income — This means earning money without expending effort. Being a landlord of an investment property gives you this privilege, as you can expect regular rent from your tenants without actively doing anything to earn it. Statistics show that demand for rental units has increased, which in turn has driven rental prices — and your potential for passive income — upward. Rental vacancy rates dropped from 40% in 2009 to 25% in 2019, while the monthly median asking price for rent for unfurnished apartments in 2018 went up nearly 50% over the prior 10 years.
- Tax benefits — When compared to the way salary and wages are taxed, rental income is taxed somewhat more favorably. This is because operating expenses like property management fees, interest on mortgages, advertising fees and general maintenance can offset your taxable rental income. A list of common rental expenses can be found in IRS publication 527. What’s more, you can potentially depreciate the cost of your investment property, but be aware that if at some point you sell the property for a capital gain you’ll be liable for tax on the depreciation you’ve taken. Keep in mind, though, that tax laws often change, so it’s a good idea to get professional advice when necessary.
- Greater control — When you buy an asset like shares in a company, you’re unlikely to get any visibility, let alone a say in how the company is run. With an investment property, though, you get to walk through it and decide how you’ll maximize your rental. Perhaps you’ll renovate or change the furniture, or you might consider a different advertising strategy — the choice is yours.
- Leverage — Unlike other investments, you can buy a property with only a bit of your own money and rely on a lender to finance the rest. You’ll come away from it with a mortgage, but the ability to leverage means you can buy a bigger, more valuable asset.
- Security — While real estate values and rental prices fluctuate, property investors argue this form of investment is “safer” than assets like shares because properties don’t go bust in the manner that companies do. In 2019 alone, 63 companies with publicly traded stock or debt filed for bankruptcy.
- Capital growth — Depending on the location of your property, how much you pay for it, the way it’s financed and how long you hold it for, there is potential to profit from both rental income and the increase in property value. Though by no means certain, the prospect of capital growth is attractive to many investors.
Best properties for investment?
The key to a successful investment is finding the right property. It’s all about buying in the right area, knowing who your ideal tenants are and understanding what appeals to them. There are a number of things to look out for when conducting your property search, including:
- Growth area — Buying in an area with a growing population and burgeoning economy makes sense because there’ll likely be greater demand for rental units. Growth often leads to better infrastructure and more amenities, and this gives you an increased chance of capital growth in the future.
- Low vacancy rate — A profitable investment hinges on the property being rented out consistently. To avoid periods with an empty property and no tenants, invest in an area with a low vacancy rate. The vacancy rate expresses the number of unrented properties as a percentage and is a useful measure of rental demand.
- Matches the local market — In keeping with the mindset that it’s all about your potential tenants, it’s a good idea to invest in the kind of property that matches local demand. For example, if the neighborhood you’re considering is made up of mostly students and young professionals, you might struggle to find tenants to fill a large family home. When trying to understand the demographics of your target area, the Census Bureau QuickFacts website can be an invaluable resource.
- Ready to rent — Unless your goal is to renovate a fixer-upper and flip it for a quick profit, you’re better off investing in a property in reasonable condition so you can start renting it out and receive rental income straight away.
- Access to amenities and schools — If you take a look at online real estate and rental marketplaces like Zillow, you’ll see that parks, restaurants, shopping hubs, movie theaters and schools are often used as selling points in featured advertisements. Properties with access to amenities and good schools can potentially command higher rental income, but they’ll also likely cost more to buy, so you’ve got to strike the right balance.
- Reasonable property taxes — Property taxes are collected by your local or state government and are based on the assessed value of your property. They can vary widely from place to place, so make sure you find out what these are in your target location. The IRS provides a useful list of links for you to find property tax information by state.
The final word
Finding an investment property isn’t the same as buying a home to live in. It’s vital you keep the needs of potential tenants in mind rather than your own preferences. Renters are likely to prioritize factors like convenience and access to amenities over fancy features, so do your research on the demographics of your target area before parting with your money.