Investors who wanted to enter the real estate market traditionally purchased homes in their local area, but that limited their potential return on investment. Now, the Internet provides investors with the ability to purchase properties from across the country. While this freedom has undeniable benefits, it also puts a greater focus on the investor’s understanding of the single-family rental home market.
It’s easier than ever to enter the world of SFR investing, but successful investors still rely heavily on their own knowledge. Here are some facts novices to SFR investing should keep in mind:
Real estate investing provides many benefits that other asset classes can’t match. For instance, real estate purchases can be financed using a mortgage. This means that set amount of capital can be used to purchase multiple properties, or that a single property can be purchased for much less than its actual sale price.
Rental property purchases are prime candidates for financing, because investors can offset the monthly mortgage costs with the income they receive from rentals. Every time the investor pays into the mortgage, he or she builds equity in a physical property.
It is possible for financing to backfire if property values rapidly decline following the initial home purchase, but investors can avoid this risk by selecting properties in areas that feature healthy housing markets and a strong economy overall.
While the leverage offered by financing is a huge advantage for real estate investors, there are some caveats to keep in mind. According to Bankrate, mortgage insurance doesn’t cover investment properties, meaning investors need to put down more than 20 percent of the total purchase price to gain financing.
Of course, it’s always beneficial to have a strong credit report, and many lenders will look kindly upon borrowers who have prior real estate investing experience.
Real estate investing can help reduce your taxes
Death and taxes are life’s certainties, but real estate investing can help you avoid paying an arm and a leg when tax season rolls around. The rental income you receive from tenants is taxed under normal income tax laws, according to the IRS, but the government does not take a percentage of this income for Federal Insurance Contributions Act taxes that fund Social Security and Medicare.
Additionally, the depreciation of a rental home offers substantial tax benefits. At the time of purchase, investors can take an annual tax deduction equal to the building’s current value divided by its useful life. The IRS caps the useful life of a building at 27.5 years, but this can still provide a serious tax break for investors. This deduction is particularly helpful, because it partially counteracts the high upfront cost of purchasing a home and shields the buyer from depreciation that is natural for a physical structure.
You should view SFR rental purchases as long-term investments, and the IRS rewards this type of thinking. If you sell a home within a year of purchase, you will incur a capital gains tax on the money you make from the sale. If you hold onto the home for more than 12 months, however, IRS lessens the amount of capital gains tax levied.
Location is critical
The physical location of a property doesn’t affect your ability to purchase the land, but it can have a massive impact on the rental property’s overall profitability. The housing market varies wildly between different cities, and SFR investors need to locate the metro areas that couple a strong demand for rental housing with limited housing inventory and relatively low initial purchase prices.
The best investors track all these factors to locate the areas that will provide the strongest yields on their initial investment, but it can be difficult for a new investor to grasp the larger economic picture that makes certain locations strong investment prospects.
For instance, Columbus, Ohio, is an excellent investment location because its diverse economy has been growing steadily over the past several years, according the Bureau of Economic Analysis. This led to widespread population growth, and the area currently features friendly home prices that make it feasible for investors to easily enter the market. While Ohio’s capital might lack the glamor of some well-known housing markets on the nation’s coasts, it is an ideal place for investment success.
Investors who are unsure where to invest or how to best profit from single family real estate should turn to HomeUnion. Registration on HomeUnion’s site gives investors access to hundreds of prevetted properties in the best markets for single family rentals across the nation. HomeUnion handles property and tenant management and makes it easy to procure financing through an in-house lender. For the new investor or an experienced pro, HomeUnion makes real estate investing simple.