Everything you need to know about buying real estate for profit
Purchasing an investment property is a great way to generate additional income, but it isn’t as simple as hitting the real estate market in search of a great deal. There are substantial differences between purchasing a primary residence and taking on an investment property. From tax liability and insurance premiums, to what you should expect from a mortgage lender, below we have outlined the key differences between a primary residence and an investment property.
Primary Residences vs. Investment Properties
A primary residence is the home you live in for the majority of the year. To be considered a primary residence, the property should be within a reasonable distance of your place of employment. If there is ever a question of where you reside for most of the year, you may be required to prove your residence with documentation, such as your voter registration or a tax return.
Primary Residence Benefits
One of the major differences between primary residences and investment properties are the guidelines pertaining to taxes and insurance premiums. Primary residence owners can take advantage of several tax write-offs to make their property taxes much more manageable. According to TurboTax, some of these deductions include mortgage interest, property taxes and the interest on your home equity loan. Primary residence owners are also entitled to $250,000 in profit before they’re forced to pay any taxes on the sale of their property.
An investment property is as straightforward as it sounds – real estate that is purchased with the intention of earning a profit. Return on the investment can be earned through renting out the property, or by “flipping” or renovating the property with the intention of selling it.
Investment Property Benefits
While it’s easy to benefit from the several deductions associated with primary residences, those with an investment property will not have access to the same advantages. Investment property owners are entitled to some deductions, but they come with a stipulation – the owner must rent out the property.
For the most part, homeowners insurance and rental property insurance are very similar. Just like the tax benefits of a primary residence compared to an investment property, insurance premiums for primary residences are generally much cheaper. The reason for this is because insurance companies assume that renters will leave their units in much worse condition than a home you own. The two major disparities between these types of insurance are loss of rental income, which is designed to protect landlords, and the items protected in covered losses. According to The Nest, you should expect to pay 15-20 percent more for landlord insurance, despite not receiving coverage on several types of damages that are covered under homeowners insurance.
Investment Properties and Mortgage Loans
Working with mortgage lenders to purchase an investment property is a complicated endeavor that can backfire at any moment if you’re not prepared. According to Investopedia, lenders will generally require investors to put a down payment near 30 percent of the final purchase price for investment properties, rather than the typical expectation of 10-20 percent for your primary residence. If you’re unwilling to pay these steep prices on a down payment, you may be interested in a Fix-and-Flip loan. Fix-and-Flip loans are much more affordable up front, but generally have rather high interest rates.
It can be tempting to enter the real estate market before having an understanding of how investment properties work. However, educating yourself on the intricacies of these deals will play a major role in your level of success as a real estate investor. To learn more about becoming a player in the real estate market, contact Anselmo Lindberg & Associates today.