Directly owned real estate may prove to be a wealth builder. If you own a solid property, chances are that you’ll be able to rent it out and collect a decent income stream.
The catch? Owning investment property can be time-consuming. You would have to be willing to be an active property manager yourself, or else you would have to hire one—who would need to be overseen at least to an extent and who would consume some of your profits.
If you decide to go ahead and purchase an investment property, here’s what to look for:
1. Location. As the old saying goes, the three most important factors in real estate are “location, location, and location.” That may be an old saying but it’s still true.
2. Property status. If you invest in developing a property, you have more risk as well as more upside potential. Buying real estate that’s already fully rented is a safer investment.
3. Condition. If you buy an existing building, have it inspected to gauge the need for maintenance and repairs.
4. Price. Naturally, you don’t want to overpay. Find out what other buyers are paying for similar properties. If you’re buying an existing property, ascertain its net operating income (gross rental income minus operating expenses). Expect to pay five to 10 times this NOI number, with the higher prices going for properties that are likely to need less active management.
5. Legal exposure. Not only do you want clear title to any property you buy, you also want to be sure to avoid environmental headaches. It’s worth paying a fee to an experienced lawyer.
Owners of investment real estate may create a limited liability company (LLC) to hold the property. An LLC is taxed like a partnership, which is favorable: no corporate income tax, a chance to deduct paper losses.
In addition, an LLC offers limited liability so any claims arising from operating the property won’t jeopardize your other assets. If you are personally subject to a creditor’s claims, real estate held in an LLC may not be exposed to that creditor.