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Entrepreneurs have been using investment properties to build their wealth for decades, regardless of market conditions. In a good market, fix-and-flips can deliver fast returns; in a sluggish market, returns are usually better than stocks.
Before you dive into investment property research, follow these five tips to ensure that you’re moving in the right direction.
1) Do: Identify a Timeframe – Short term or long term?
There are two types of real estate investments:
Short-term – Less than one year.
Long-term – More than one year.
Short term investments, aka fix-and-flips, can result in tax rates on the profit as high as 35%. Long term investments can yield a lower tax rate, as low as 10%-15%, depending on the use of depreciation deductions and the use of a REIT.
Talk to an experienced real estate investment property lender and your tax accountant about both options. Ask your lender to print out a good faith estimate of all the fees/costs going in, and give this estimate to your accountant. Go over the following items with your accountant before making an offer and identify a timeframe for your investment:
2) Do: Invite a Realtor to Help
While it’s tempting to devote your time to research, a Realtor will gladly share market data with you and give you the appreciation rate for homes in certain school districts, growing neighborhoods, etc. Instead of spending time on the internet and reading books, get out there and start looking at properties. You won’t know what a great deal looks like if you haven’t seen other homes in the same price range.
3) Don’t: Ignore Your Business in Favor of Real Estate
It’s easy to become obsessed with real estate; it’s exciting to dive into a new type of investment, and it has the potential to steal your attention away from more important matters.
Real estate property investments are just that: Investments. Treat it as other investments and let the professionals do the work for you. While you will need to educate yourself and learn about the market, the tax consequences, and the transaction process, you shouldn’t let real estate divert you from your main business goals. Remember, real estate investing should support your main business, not take away from it.
4) Don’t: Don’t Look for the Perfect House
Real estate investors often miss out on good deals because they are looking for a house that doesn’t exist. Avoid losing out on a good investment because of minor details. An investment home should have a list of “must haves” and a list of “good to haves”. Are you passing over good investment opportunities for items that aren’t on the “must haves” list? If so, you have developed a case of analysis paralysis. Take a break, refocus, and start over.
5) Do: Identify Your Exit Strategy
The real estate market changes over time, requiring investors to change their long-term plan. Identify several exit strategies before you invest in real estate so that you are prepared for market changes and scenarios.
As an entrepreneur, you can use real estate investing as a tool to fund and grow your business. Remember that the investment is a means to an end, and getting caught up in details that can be delegated to Realtors, lenders, and home improvement specialists will help you stay focused. So, if you’re ready to begin the process of looking at investment properties in Charlotte and surrounding areas, get in touch with an expert real estate team.