Directly owned real estate can be a creator of wealth. If you own a solid property, chances are you can rent it out and collect a decent income stream.
The problem? Owning an investment property can take time. You should be prepared to be an active property manager yourself, otherwise you should hire one, who should be supervised at least to some extent and consume some of your profits.
If you decide to go ahead and buy an investment property, here’s what to look for:
1. Location. As the old saying goes, the three most important factors in real estate are “location, location and location”. It may be an old adage, but it’s still true.
2. Ownership status. If you invest in the development of a property, you have more risk as well as greater potential for growth. Buying a property that is already fully let is a safer investment.
3. Condition. If you are buying an existing building, have it inspected to assess the need for maintenance and repairs.
4. Price. Naturally, you don’t want to pay too much. Find out what other buyers are paying for similar properties. If you are buying an existing property, check its net operating income (gross rental income minus operating expenses). Expect to pay five to 10 times that NOI figure, with the higher prices going for properties that are likely to require less active management.
5. Legal exposure. Not only do you want clear title to any property you buy, but you also want to be sure to avoid environmental headaches. It is worth paying fees to an experienced lawyer.
Owners of investment real estate can set up a limited liability company (LLC) to hold the property. An LLC is taxed like a partnership, which is advantageous: no corporation tax, possibility of deducting paper losses.
Additionally, an LLC offers limited liability so that any claims arising from the operation of the property do not compromise your other assets. If you are personally subject to the claims of a creditor, real estate held in an LLC may not be exposed to that creditor.
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