Have you ever wondered how someone you know, perhaps a colleague, neighbor or family member, just bought another house — not to live in, but to make money from as an investment property? Maybe they’ve been buying real estate for years or maybe it’s their first purchase. Either way, you’re curious about the concept and process.
You think, “Why buy another house? How are they going to earn money from it? Who helped them get started? It’s a mystery!” But it doesn’t have to be.
Let’s take a closer look at the “whys”, “hows” and “whos” of investment property ownership, so you can determine if it’s a good fit for your financial goals.
Why Buy Investment Property?
The short answer to this question is to build wealth. While there are other, less expensive ways to do this — such as consistently adding to your savings, limiting your spending and expenses, and increasing your income (through a promotion, new job or side job) — adding an investment property to the mix can supercharge the process of creating wealth.
Three specific reasons to purchase an investment property are:
- Real estate is a tangible asset, meaning it has a physical form and financial value. You can see it and walk through it. While the housing market can ebb and flow, real estate, as a physical asset, tends to increase in value over time. It is usually always in high demand because people always need a place to live. This gives you financial security.
- Investment properties can generate cash flow. This means you can use any rent you collect to pay down debt, invest in other properties or just enjoy a passive income stream (income that comes from something other than an employer).
- Real estate can provide tax benefits. It can help you save on taxes owed through a variety of IRS deductions and credits, such as writing off expenses for mortgage interest payments, repair and maintenance, and operating costs.
How Do You Make Money with An Investment Property?
Now that you know the “whys”, let’s dive into the “hows”.
In the book “How to Invest in Real Estate”, the authors Joshua Dorkin and Brandon Turner note, “The world of real estate is so large that most might only see a small part of the beast.” You can make real estate work for you in a variety of ways, based on where you live, your income goals, your time available to work as an investor and the risk you’re willing to take.
The following are the top five strategies for investing in real estate.
- Rental properties are one of the most common types of real estate investments. This involves buying a property and renting it out to tenants. The goal is to generate cash flow from the rent payments and to see the property appreciate over time.
- Flipping houses is a more aggressive strategy that involves buying a property, renovating it and then selling it for a profit. This strategy can be profitable, but it also carries more risk. You need to be able to find undervalued properties so you can renovate them for a profit. You also need to be able to do the renovations yourself or hire someone to do them.
- Vacation rentals are properties that vacationers rent on a short-term basis. This can be a profitable strategy in popular tourist destinations. However, it also requires more work than traditional rental properties. You need to be available to handle bookings and check-ins, or hire someone to manage that for you, and you need to maintain the property.
- Commercial properties are used for business purposes, such as office buildings, retail stores and warehouses. This can be a more profitable investment than residential properties, but it also requires a larger investment. You need to be able to find properties in good locations to lease to tenants with good credit.
- Land development is the process of acquiring land and then developing it into something more valuable, such as a subdivision, shopping center or industrial park. This can be a profitable investment but requires a lot of capital and experience.
These are just a few of the many strategies that you can use to invest in real estate. The best strategy for you will depend on your goals, your risk tolerance and your financial situation.
To become a successful real estate investor, it is important to do your research and understand the risks and rewards of each strategy. You should also develop a plan and stick to it, and to develop that plan, you need a team of professionals, which leads us to the “whos.”
Who Do You Need on Your Investment Property Team?
Building a successful investment property portfolio takes more than just money. You also need a team of experts to help you along the way, people who can help you find the right properties, finance your investments and maximize your investments.
The five key members of an investment property team include:
- Mentors provide real experience. They can be a guide as you start your business and give you feedback on what worked, and didn’t work, for them.
- Realtors who either invest in real estate themselves, or know the market you are looking to invest in, are valuable. They often know about current homes for sale or homes expected to come up on the market.
- Lenders/loan officers can give you different financing options to achieve your goals to purchase investment properties. They can help you be better prepared to buy a property.
- Real estate/tax attorneys review legal documents or contracts when appropriate to ensure you are setting each purchase up for success, limiting your risks as much as possible from a legal standpoint.
- A CPA or accountant helps you maximize your real estate purchase through tax preparation, write offs and bookkeeping.
How a Loan Officer Can Help You Buy an Investment Property
For one last “how,” I’d like to expand on how a loan officer can help you because the financial process is often the biggest — and scariest — part of the mystery.
Loan officers will review your credit, income and debts, and discuss the different buying strategies and financing options available to you. Talking to a loan officer early on can give you a head start on the details of what you need to complete before you even start looking to buy an investment property.
Here are three stories to illustrate how a loan officer can help you:
- Lisa wanted to buy a rental property in Arizona but needed a bigger down payment to qualify for better lending options. Her loan officer suggested taking out a small home equity line of credit (HELOC) on her current residence to borrow from to make a larger down payment. This allowed Lisa to make an offer on the home and close 30 days after the offer was accepted.
- Jonathan wanted to buy several investment properties over the next 10 years after reading the book "Rich Dad Poor Dad", which details the power of real estate to build wealth. His loan officer reviewed his personal and business tax returns, and identified enough income to buy one rental property immediately and two more a year later.
- Steve found a discounted home being sold as part of an estate sale. After reviewing the financing options, it made more sense for Steve to buy the home with less money down, using a private loan. His loan officer suggested a private moneylender he had worked with previously. This allowed Steve to close on the property in less than 10 days. Thirty days later, he paid off the private loan using a traditional loan.
A Final Thought
So there you have it, the “whys”, “hows”, and “whos” of investment property ownership.
If you're thinking about getting started, I encourage you to do your research and build a team of experts. Feel free to reach out to any one of Bank of Utah’s experienced loan officers if you have more questions. Remember, with the right plan and the right people, you can achieve your financial goals through investment property.
Tim Roberts is a senior loan officer and mortgage branch manager at Bank of Utah’s City Creek Banking Center. He has worked with credit borrowers for 27+ years and has worked in his current role with Bank of Utah for 11 years. He belongs to the Salt Lake Board of Realtors as an affiliate member. Tim enjoys working with clients and educating them throughout the loan process.