I’m working with several investors right now. They believe that the Northern Virginia and DC market is having a ‘perfect storm’ of opportunity: low prices, high rents, and ridiculously low interest rates, even for investment properties (which historically have carried a significant premium to owner-occupied properties.) I recently had a transaction where the investor put 25% down and paid just 4 1/8% on a 30 year fixed mortgage! And all in an area that is arguably the strongest job market in the country. The property, located within walking distance of the incredibly popular orange line in Arlington and commands high rent, was cash flow positive immediately.
Given my business background and CPA, I tend to get a lot of inquiries from potential investors–some experienced, and some looking to buy their first investment property.
- How do I find a neighborhood that is good for investment properties?
- How do I estimate my expenses and cash flow?
- How do I find good tenants?
I’ll try to address these in this and subsequent posts. The Washington Post had a good article with some items to think about when buying a home, and the lessons can also be applied to buying an investment property.
First and foremost, remember that you’re locking in the majority of your expenses via a FIXED 30 year mortgage. This means inflation is your friend. The value of the property will rise, and rents will rise, but the bulk of your expenses remain the same. This is time to buy-and-hold, not flip.
Consider the tax effects of a purchase. For owner-occupied property, the interest is deductible (within limits). For an investment property, the income is considered passive income, and the rules get much more complicated. You’ll need to file a Schedule E. Be sure to consult your tax adviser about your specific situation. You’ll also want to factor in capital gains taxes (due to significantly rise soon) for the sale.
Finally, consider the cap rate. The article states:
Make an educated guess as to what the home would rent for if it were on the open market. Granted, this is easier for condos, which have a more active rental market than single-family homes. Let’s say that for a home, on sale for $400,000, the rent would be $2,000 a month. Subtract any condo or homeowner fees, monthly property taxes, insurance, and an allowance for repairs from that rental rate. Let’s call that $500, meaning we’re down to $1,500 a month. That’s the monthly operating income an owner would expect to take in if the property were rented. Multiply that by 12 to make it an annual number, and divide by the purchase price. In this example, that leaves you with a 4.5 percent cap rate…..You can use the cap rate to compare homes you might buy to figure out which is the best deal when viewed purely as an investment. The higher the rate, the better.
In another post I’ll discuss some of the common expenses associated with an investment property.
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