What You Need to Know about Investment Property 

An investment property is a property that is bought with the intention of generating financial returns. This investment property can be an apartment, a block of flats, land, a single house or a commercial or industrial building. The profits generated though investment properties are in the form of rental income, capital growth or both.

Buying investment property

Buying investment properties is advantageous as it is usually less prone to volatility when compared to investment in shares. Buying investment property is not only a safe form of investment but also offers higher value in the long term.

Before buying investment property, you should make a decision on ways of financing the property. Decide how you are going to arrange for the cash, loan or partnership for buying investment property. Usually, mortgages and home loans are offered by credit unions, banks or building societies.

The second step would be to research the property you intend to buy. Collect MLS data to familiarize yourself with the properties on sale and how the foreclosure inventory looks like. Buying investment property can be time-consuming. However once your investment goals are met, it is worth the effort.

Investment Property Mortgages

The investment property mortgage rate is the primary determining factor when choosing a mortgage. Usually, the lower interest rate implies better the mortgage. However, assessing the feasibility of an investment property mortgage rate is actually dependent on the kind of mortgage and other loan terms. It is important to find a rate that meets your requirements.

 There are three major types of investment property mortgage rates: fixed-rate, adjustable-rate and balloon or reset.  

 Fixed-rate mortgage is a mortgage where the interest rate and monthly payments are fixed for the whole life of the mortgage. The two major types of fixed-rate mortgages depending on the period of the mortgage are 30-year and 15-year. The benefit here is that interest rates and the monthly payments do not vary according to market rates. But, in case the market rates go down, investment property mortgage interest rate remains fixed. This option is ideal in case you plan to retain the investment property for a period of more than 5 years.

The adjustable-rate mortgage (ARM) is a variable investment property mortgage rate. Usually, ARMs begin with a lower interest rate and monthly payments making it very popular. But, it is essential to know the specifics of an adjustable-rate mortgage before choosing this option. This option is best suited in case you plan to sell the investment property before 5 years of purchase or in case you prefer to begin with a lower monthly payment. 

Balloon or reset mortgage is founded on a 30-year amortization schedule usually with a 5-year or 7-year term. After the term ends, you can opt to clear off the residual principal or reset the mortgage rate as per the existing market rates. In case you believe you can clear the entire mortgage in 5 or 7 years, you could opt for this mortgage.

Investment Properties for Sale

The whole idea of purchasing a property is to make a profit in case you put the investment property for sale. In case the investment property is consistently depreciated, recapture of that depreciation would increase your taxes, and the same should be accounted for. Also, when the investment property for sale results in a loss, it would enable you to directly write-off against your income. 

When investing in a property, you should plan an exit strategy. You need to plan when you are going to put the investment properties for sale and if you will keep the sale proceeds and pay tax or if you will file an IRS 1031 for tax deferred exchange. 

Once you complete the sale, utilize a 1031 exchange to avoid immediate taxation. For this you need special paperwork when the investment property is sold. It states that you are going to reinvest the proceeds of the sale in a similar kind of property. As there is no tax due on the profit of the sale, it increases your profitability.

Investment Property Taxes

When considering investing in properties, another consideration is the investment property taxes. You become eligible to include the value of depreciation in your tax returns. Also, owners of investment property could also depreciate items, for instance furniture and fridges. You can deduct the cost of these items as against their rental income over the life of the asset.

Another consideration for investment property taxes is negative gearing. This occurs when the owner of the property borrows money for purchasing the investment property and spends more on expenses and loan interest than what is obtained by way of rental income. When negatively geared, the amount of loss can be deducted from any capital gain on sale of investment property for a profit, thereby reducing taxes.