Top Tips to Consider When Buying an Income Property
Business Solutions Historically low mortgage rates and strong rental demands have led more and more Americans to diversify their investments by purchasing an income property.
For those interested in becoming landlords, the first and most important step is finding the right property. Making a mistake here will cost you every step of the way. It is critical — especially for a first-time investment property owner — to take the time to research where to buy, how much to spend and which property to purchase.
Here are a few tips to make finding the right property as simple and stress free as possible:
1. Learn your market
As the saying goes, real estate is all about “location, location, location.” Finding a community in want of rental options will ensure that you have plenty of potential tenants, so understanding the needs and conditions of the market in which you are hoping to invest is critical. This may mean that purchasing close to your primary residence will make your first investment easier, as you already have a comprehensive understanding of the local economic conditions and the community’s selling points.
2. Get and keep your finances in order
It is important to understand that being a landlord means that you have a business. That’s why it’s crucial to have a thorough understanding of your finances, as well as a business plan for your rental property income. This includes staying on top of all the latest changes to the tax code. The Tax Cuts and Jobs Act enacted in 2017 created a 20 percent deduction for business income which, as the IRS confirmed in early 2019, can be applied to rental-property income. In order to claim this deduction, however, you must be able show your rental properties are part of a trade or business rather than just passive investments. The easy way to do this is to show you spend at least 250 hours a year on rental activities. If you don’t meet this requirement, you can still take the deduction, but you must be prepared to defend your claim. That can be a challenge, especially considering previous court cases don’t provide any clear guidance.
3. Work with a Realtor
Realtors have unparalleled knowledge of local market conditions and can leverage that expertise to help you find the right investment property. Because Realtors are involved in so many property transactions, they will have a comprehensive understanding of the communities in which you are considering buying and will know whether you are getting the most bang for your buck on your potential purchase. In addition, purchasing an income property can require a vast amount of paperwork, which a Realtor will help you manage to avoid costly delays or mistakes.