With property prices currently sagging, more and more investors are looking towards real estate as a smart addition to an investment portfolio. Certainly there is money to be made in property, but there is also a great deal of risk involved. Education and experience are the keys to navigating the often-hazardous property market. Here's a quick guide to help you build up the right property portfolio.
Why should you invest?
Property investment carries with it numerous advantages for investors. According to broker and President of Equity First Realty, Ben Yonge, the current down market is the perfect time to capitalize in the property market.
"Real estate prices are so extremely low. Buying an undervalued or distressed piece of property usually means that it can be 'cash flowed' with a nice annual yield if the right tenants are placed," he explains. "Prices are already on the rise so holding cash-flowing properties for the next three to five years should mean substantial gains in appreciation."
Preparing your finances
Gaining the correct financing is often the key to building a great property portfolio. It's always wise to arrange financing before looking at your first property, to avoid losing out to other buyers who may have already secured financing. Many lenders will demand an up-front sum of up to 30 percent as a down payment on the loan, so ensure that you've got the money prepared before proceeding.
Know your market
Buying property is a major investment, so it's important to analyze all the facts before taking the plunge. If you plan on renting the property, Yonge says that the current rental market and total cash required are the two most important factors to consider.
"Buyers need to know where they're buying and should verify that the property can be tenanted quickly," he says. "In addition to purchase costs, buyers must also factor in the costs to bring the property to rental ready condition.
Similarly, if you plan on renovating the property in order to resell it, you should speak with a real estate agent or financial planner to ensure that the investment will be worthwhile.
Even the brightest prospects can be sunk by a heavy tax burden. That's why it's always wise to consult a real estate attorney about the relevant taxes before closing a property deal, to identify any loopholes or money-saving measures. For example, investors may be able to sidestep capital gains taxes on an investment property if they have lived in the home for at least two of the last five years, according to the IRS.
Growing your portfolio
Once you've successfully purchased your first property, you can begin growing your investment portfolio. To help expedite the process, Yonge recommends hiring a professional. "Working with a good real estate agent, and preferably a good wholesale brokerage can save a ton of time and greatly increase the number of deals a buyer is able to analyze," he notes. It may be wise to invest in several different types of property to reduce risk in the face of market fluctuations.