Investing 101
Have you ever considered purchasing an investment property in Indianapolis? Real estate has created many of the world's wealthiest people, so there is a plethora of reasons to think it’s a sound investment. Experts agree, however, as with any investment, it’s better to educate yourself prior to diving in and spending hundreds of thousands of dollars. Here are some things you should consider before you buy that investment property:
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Purchasing an investment property in order to generate income can be risky
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Investors will usually need to secure at least a 20% down payment (not always the case)
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Being a landlord requires a broad array of skills, which could be as diverse as understanding basic tenant law to being able to fix a leaky faucet
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Experts recommend having a financial cushion, in case you don't rent out the property, or if the rental income doesn't cover the mortgage
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Completing a financial assessment of both your personal finances and the property’s potential prior to acquisition is paramount
1.) Are you ready to be a Landlord?
Do you know your way around a toolbox? How are you at repairing drywall or unclogging a toilet? If you answered no, you do have options. You could call somebody to do it for you or you could hire a property manager. Property owners who have one or two homes often do their own repairs and maintenance to save money. Some investors prefer a hands-off approach and want a property management team to take care of everything.
2.) Paying Off Personal Debt
Savvy investors sometimes carry debt as part of their portfolio investment strategy but tnot all debt is “good debt”. If you have student loans, unpaid medical bills, or children who will attend college soon, then purchasing a rental property may or may not be the right move. It isn’t not necessary to pay off debt if the return from your real estate investment is greater than the cost of debt. That calculation, among others, needs to be made beforehand.
3.) Securing a Down Payment
Save your money! Indianapolis investment properties generally require a larger down payment than do owner-occupied properties; they have more stringent lending approval requirements. On most occasions, you will need at least a 20% (80 LTV) down payment, given that mortgage insurance isn't available on rental properties. There are multiple ways to come up with a down payment including personal loans, family and friend loans, hard money (in the case of a renovation and refinance), institutional or bank financing, etc.
4.) Find the Right Location
This is important. The last thing you want is to be stuck with a rental property in an area that is declining in value rather than remaining stable or picking up steam. Within Indianapolis, you want to invest your money in a neighborhood where the population is growing and a revitalization plan is underway. The areas that are undergoing the most change represent the greatest potential for an investment opportunity.
When choosing a profitable rental property in Indy, look for a location with low property taxes, a great school district (or plenty of private school options), and plenty of amenities, such as parks, breweries, restaurants, and movie theaters. In addition, pick a neighborhood with low crime rates, with access to public transportation, and a growing job market. These variables, in combination, may mean a larger pool of qualified renters. (Disclaimer: All neighborhoods can be invested in with the correct strategy. All neighborhoods, regardless of immediate condition, have potential to be great investment opportunities but are usually best handled by professional investors.)
5.) Should You Pay Cash or Finance?
That depends on your investing goals but it is generally smarter to finance and leverage your money. Paying cash can help generate a positive monthly cash flow but this strategy constrains the investor in the number of properties they can buy. For example, there’s a difference in paying cash for a $100,000 property and putting $20,000 down on 5 separate $100,000 single family houses. One strategy yields a larger positive monthly cash flow per unit, the other allows for greater equity appreciation. The tax benefits of financing usually outweigh an outright cash purchase. Many investors use ratios and calculations such as “Cash on Cash” to determine the best route to take.
6.) Beware of High Interest Rates
The cost of borrowing money might be relatively cheap in 2021, but the interest rate on an investment property can be higher than a traditional mortgage interest rate. If you do decide to finance your Indianapolis investment property, you need a low mortgage payment that won't eat into your monthly profits too much. Utilize a knowledgeable broker to connect you with the right lender.
7.) Calculate Margins
An abbreviated list of investment property costs include insurance, homeowners association fees, property taxes, property management fees, mortgage, monthly expenses such as pest control, and landscaping upkeep, along with regular maintenance expenses for repairs. Use your investment broker to complete a deal analysis. If the numbers don't work, don't buy!
8.) Weighing the Risks And Rewards
In every financial decision, you must determine if the payoff is worth the potential risks involved. Does investing in real estate still make sense for you?
Rewards
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Because your income is passive, notwithstanding the initial investment and upkeep costs, you can earn money while putting most of your time and energy into your regular job.
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If real estate values increase, your investment also will rise in value.
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You can put real estate into a self-directed IRA (SDIRA).
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Rental income is not included as part of your income that's subject to Social Security tax.
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The interest you pay on an investment property loan is tax-deductible.
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Short of another crisis, real estate values are generally more stable than the stock market.
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Unlike investing in stocks or other financial products that you cannot see or touch, real estate is a tangible physical asset.
Risks
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Although rental income is passive, tenants can be a pain to deal with unless you use a property management company.
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If your adjusted gross income (AGI) is more than $200,000 (single) or $250,000 (married filing jointly), then you may be subject to a 3.8% surtax on net investment income, including rental income.
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Rental income may not cover your total mortgage payment.
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Unlike stocks, you can't instantly sell real estate if the markets go sour or you need cash.
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Entry and exit costs can be high.
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If you don’t have a tenant, you still need to pay all the expenses.
A Final Word
Be realistic in your expectations. As with any investment, an Indianapolis rental property isn't going to produce a large monthly paycheck right away, and picking the wrong property could be a catastrophic mistake.
For your first investment property, consider working with an experienced broker that has investment properties in Indy like me!
Paul Shay, MBA
Century 21 Scheetz | Terry Brown Group
643 Mass Ave
Indianapolis, IN 46204
859.420.3093
