How To Finance an Investment Property Guide

Author: William Eve

Financial powerhouse Alan Greenspan once said that the key to success in a society is the ownership of property. Although he used this idea to back up his support of those sub prime mortgages that lead to the housing crisis they are not that far off base. Anyone who has made money on investment properties will agree that it is an excellent way to make money, even if you do not have that much to initially invest.

Unlike many other types of investment buying property is relatively low risk. If you buy at a good price there is almost no chance that you will not be able to turn around and sell the property for at least your investment and probably a little more. However, before you run out and start buying up houses and running advertisements for rentals you should do some homework. It is not as easy as one might think to get the right property at the right price.

Investment Property Financing Guide

The key to getting ahead financially with your investment property is understanding that you are actually opening a small business. Unlike your personal residence which does not return a profit to you, this property will need to do that. In order to make certain that you will make enough money to cover the mortgage and your operating costs you must do careful financial analysis. The last thing you want is to wind up with a house that costs more to own then you could ever possibly charge in rent. As with most things a solid plan of attack is the very best way to avoid this situation.

How will your property be financed? If you are like most people you probably do not have enough cash around to buy a property outright so you will have to take out a loan. A lot of investors choose interest only loans because the interest is tax deductible. That being said, the current interest rate and the one you will be approved for should dictate the type of loan you choose.

If rates are very high you will be better off paying toward the principle so that the loan costs less. Along with that you will have to choose between fixed, variable, split rate, or a line of credit loan. Should you strike while interest rates are low you will want to lock in that rate with a fixed loan. Otherwise, variable rate loans allow you to take advantage of market changes and switch to a fixed rate if they bottom out.

As an investor and not just a homeowner you will also have to take something called gearing into consideration. Gearing is all about the relationship between debt and equity. When your property returns a loss regularly it is negatively geared and when it returns a regular profit it is positively geared. A negatively geared investment will have short term losses but a long term gain while one that is positively geared is more conservative and allows for immediate returns.

What are your operating costs? There is a lot more to owning an investment property then just charging enough rent to cover your mortgage. The only way to get ahead is charge enough to cover all of your investment including the taxes, realtor fees, insurances, and any other charges you paid to actually buy the property. Again, that means figuring out what your actual cost will be before you make a commitment to one property. A good realtor or real estate attorney should be able to help you figure out all of these costs.

On top of making back your investment money you must also include the costs you will incur as the landlord of your property. Many investors have been foiled because they do not account for or do not account enough for the cost to keep their property running. Things like homeowners warranty to cover the cost of big repairs, your yearly tax assessments, and your bank account fees are easy enough to track.

You will also need to come up with a figure that includes other expenses you will incur like fees for running ads to list the property for rent. Your travel costs to get to and from the property as the situation arises. Costs to make repairs both regular and unexpected that are not covered by the warranty, and even the cost to mail important documents to your tenants or the city. These costs can get out of control if you do not account for them in the rental price. If you are lucky enough to not have to spend the money throughout the year you can make additional payments on the home loan as you see fit which will lower your interest fees and add to your profit margin.

What are your taxes? Yes, you are going to have to pay property taxes there is no getting around it. Yes, those taxes can be quite high so you will want to find every possible way to get deductions for your property. There are several deductions that investors can take advantage of including interest repayments and expense like improvements and repairs to the property. There are also capital costs which are those costs that you incur when you buy or sell a property.

While they are not a tax deduction you can use them to offset the capital gains tax when you sell, so keep track of them and contact a professional to help make sure you have all of your tax ducks in a row. Depreciation is another thing you should carefully track. The depreciation on things like appliances can be applied to your taxes as a deduction. Keep in mind that although this deduction might not seem like much each year when it comes time to sell the property that depreciation value will hold and if you have not claimed it each year as a deduction there is no way to recoup the money.

Who is your lender? If you are interested in long term property investment the relationship between you and your lender is going to be key to your success. It is more then just doing business with the bank that offers the lowest interest rates. What you need is a lender that you can contact for quick assessments and calculations and one that understands your finances as well as you do. Do research and find a lender that is going to be there for you as an individual and not just another account number. When you have a relationship with your lender you will be able to call them up, get a real person on the phone, and get the answers you need at a moments notice. If you do not have that kind of bank then it is time to find a new one.

The success of your investment property depends completely on your ability to see the big picture. You have to be smart enough to understand what your property will cost not just today but in a few years so that you can actually make enough to cover those costs. If you can do that you will find that property investment is indeed one of the keys to success.

Disclaimer: This article is for your information, but it may not apply to or be suitable for your situation, so seek professional advice. Youth 2 Youth cannot be held liable for anything resulting from how you use the information provided in this article.

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