What You Should Know Before Buying an Investment Property

There are many advantages to owning an investment property. But there are also dangers and pitfalls. Let’s look at some of both. To begin with, an investment in a rental property should offer a net return that is greater than what are considered conservative investments such as bonds, treasury bills, or dividend-paying blue-chip stocks because of the risks involved in ownership (housing prices and the economy can fluctuate, for example). First let’s look at some of the pros of investing in rental properties.

Owning rental properties have tax benefits for the owner such as the ability to deduct insurance, mortgage interest, maintenance costs, and improvements. Also, depreciation on the property may be deducted, but this can become complicated and can be best handled by your accountant. But briefly, depreciation may be deducted as a loss for tax purposes. This loss may be deducted against other income. So, you may achieve a net positive cash flow from the rental income minus expenses and still have a net loss for tax purposes.
The 2017 Tax Cuts and Jobs Act offers some other benefits for landlords. You may be able to deduct an amount equal to 20% of your net income, if your annual income after all deductions is less than $250,000 for singles or $500,000 for married couples filing jointly. This deduction allows non-corporate taxpayers to deduct up to 20% of their qualified business income. But this tax bonus is also best left in the hands of your accountant.
If your rental is of a seasonable variety, you may be able to use it and enjoy it yourself for 14 days per year or 10% of the time you rent it to others – and still be able to deduct your expenses.
In what is known as a 1031 exchange, you can sell a rental property at a profit and invest in another rental property “of like kind” without paying a capital gains tax on the property you sold.
Real estate investment has proven to be one of the best investments a person can make over the long term, providing the best return with a low risk. But as with all investments, there are exceptions. Due diligence and professional advice are wise choices.

Here are some of the cons of owning an investment property.

Lack of liquidity. Even in a bull real estate market, it can take months to close a deal. And if an emergency should occur during this period, you may find yourself in a serious cash crunch.
Taxes and/or insurance premiums could rise, which can cut into your profit.
Although you may have checked a tenant’s credit rating, references, etc., you may still wind up with less than desirable tenants. They may be unreasonably demanding, pay late, forget to turn off the water, be destructive, etc. And if you’re in the unfortunate position of depending on your rental income to pay the mortgage on your home on time, your relationship with the bank can become strained. You may also face late fees.
The neighborhood you invested in may begin to decline for a variety of reasons. Your early due diligence can help in this regard.
While many repairs may be deductible, being the kind of person who is handy can save large sums of money.