How to Make Money in Residential Real Estate: Part Two
With a strengthening economy and a long-term plan, it is quite possible to make money in residential real estate and create a solid income. Careful planning and an understanding of some basic financial principles can help you develop a steady cash flow as well as tremendous equity in a property that will provide a significant return on investment at an eventual sale.
How to make money in residential real estate: Three key features for choosing the right investment property
- Although this phrase is over-used, it still represents the greatest truth in real estate investment – ‘location, location, location’. When looking for the ideal property to invest in, it is critical to keep the interests of potential renters in mind. For most people, there are definite ‘givens’ in terms of the location they will choose:
- Safety – the neighborhood must be relatively secure and stable
- Schools – for families, the proximity to a school is an important issue
- Surroundings – recreational facilities, access to transportation, possible improvements to infrastructure or the creation of new business are a plus
- Size – homes that are too large or too small have limited appeal and large properties require too much care for many renters
- That leads to the second factor in realizing the best ROI possible – appreciation. Simply defined, appreciation is the increase in the value of the property. When looking for a property that will appreciate and ultimately provide a good ROI, it is best to consider a home with potential as opposed to one that is already ‘the best on the block’. Choosing a property that needs some cosmetic work offers you the opportunity to make improvements that you can declare as expenses and have a better quality property in the future when you are ready to sell for greater profit.
Unless you plan to live in the home, it is best to invest in a basic structure that has not had expensive upgrades. What the previous owner may have liked may no longer be in style or what potential renters may need so it is pointless to pay for unnecessary amenities. Clean, sturdy, functional properties make the best investment choices.
For a better idea about the trends in property appreciation in your area, visit the Office of Federal Housing Enterprise Oversight.
- The third element for ensuring the most cash in your pocket at re-sale is the federal Capital Gains Tax which is also a state and even local issue. Capital gains are the difference between the price you paid for the property and the amount you sell it for. Tax is paid on the ‘profit’ from that sale and is determined separately from your regular income tax. A fairly high threshold means that many people will not have to pay much, if any, tax but the key to minimizing the amount of your capital gains is living on the property for at least two years out of five and making improvements to the property resulting in an ‘adjusted cost basis’. In addition to actual improvements, you can also deduct expenses such as inspection costs, attorney fees, real estate commission, transfer fees and money spent to ready the home for sale.
Choosing an investment to help insure a secure future is always a gamble but with a bit of planning, creativity and smart decisions, real estate is a relatively safe, virtually guaranteed way to make money.
Looking for advice on how to make money in residential real estate? For complete, friendly service to help make your real estate transactions smooth and profitable, contact Derek Worchel at Keller Williams Western Realty, serving Blaine, Lynden, Bellingham and Ferndale, where professional experience means professional results.