2023 and Investment Properties: What's in it for You?

2023 and Investment Properties

Real estate is typically known to be a smart and safe investment. And despite the current economy, that still stands true, especially when using passive income that you may already have through equity and other investments. While we're seeing fluctuating interest rates, lower than normal inventory, and many facing economic strife, let's discuss why owning an investment property is still a key move for long-term wealth.

Here's what investment properties can provide:

• Diverse Financial Portfolio
• Tax Advantages
• Passive Income
• Profit Through Appreciation

Diverse Financial Portfolio

A diversified portfolio simply means you have different financial investments that are combined to lower your risk of losing money as an investor. This can include stocks, bonds, and real estate.

Stocks

When investing in stocks, you may want to choose from different industries. You'll decide what the goal of your portfolio is and then choose stocks accordingly. Stocks can be risky, however, as the market goes up and down.

There are many ways to go about choosing your stocks. We recommend speaking with a financial advisor and making the best choice for your current financial situation and long-term goals.

Bonds

Investing in a bond can be seen as more stable than stocks depending on which bonds you choose. There are many different types of bonds, all with different maturation rates. The safest of bonds is a U.S. Treasury bond because it offers the smallest amount of risk and can be catered to the goals of the investor.

Bonds such as high-yield, corporate bonds, and mortgage bonds (different than having a mortgage) will have more credit risk associated with them.

Real Estate

Real estate is typically considered to be the safest investment due to appreciation (unless renting) and passive income with minimal risk if you invest in the right market.

Tax Advantages

Owning real estate can be expensive. There are property taxes to pay, a potential mortgage payment (this is why we recommend using passive income you already have to purchase investment properties), homeowners' insurance, residential upkeep, etc. However, rental properties can also come with some tax breaks such as:

• Mortgage interest deduction (for house loans up to $1 million)
• Losses from natural disasters or theft
• Travel expenses to maintain your property
• Services of accountants, property managers, or lawyers
• Insurance premiums
• Useful life depreciation (deduction of the cost of buying or improving the rental property)
• Lawn maintenance
• Utilities (if not paid by the renter)

While these tax advantages are a great perk of owning an investment property, make sure you have a trusted accountant on hand to help with any of these deductions.

Passive Income

There are many ways to make passive income off real estate investments but we're going to focus on rental properties.

If you own a condo, duplex, or single-family home that you rent out to tenants, you can easily make up for the mortgage plus some in rent. This doesn't mean you won't have any expenses. Remember, depending on the lease, you will need to cover things like broken appliances, the HVAC going out, or even plumbing issues. With the current rental market being hot, you can easily make those costs up.

Some people choose to do shorter rentals, such as a vacation home. This is a lucrative business and allows you to use your investment property when you want but make money off of it when you don't.

Because a vacation rental will have more turnover than a long-term rental, you'll have to adjust pricing for either a property manager to take care of the upkeep, or to do it yourself. This can be challenging if you don't live in the area. When looking at the potential income from a vacation rental, make sure you factor in vacancies, as that can make a BIG difference.

Profit Through Appreciation

If you purchase an investment property as a second home, you can still make money off the appreciation of the home. In 2022, the average appreciation of a home was 20.3%! We aren't expected to see that high of appreciation in 2023, but we will see more affordability in about half the markets across America, making it a great time to invest.

Now that we've given you all the information on WHY owning real estate is a smart investment, let's talk about the HOW. Here's the top three things to focus on when looking at getting started with any big purchase:

1. Budget

To get started in any real estate investment, it's imperative you have a firm grip on your budget and finances. When it comes to investment properties, we recommend avoiding debt to finance the purchase, if possible. Why? Because taking on MORE debt when trying to make a profit is rarely a favorable decision.

If you have already paid off all other debt and have a diversified portfolio, you'll have more opportunities to buy real estate without needing a home loan. At the very least, you can put more down upfront, resulting in a smaller home loan amount or better financing options.

If you do have to take on a lean, you'll need to decide what you're comfortable spending. Remember, what you're comfortable spending and what you're approved to spend can be two very different numbers!

2. Make a Plan

After you know your finances are in order and you have a plan for your real estate investment, it's time to figure out what form of real estate investing will work for you.

• Do you want to rent out your current home while living in something more affordable to make a profit quickly?
• Are you looking to own something that can be a short-term rental in a beach or ski community?
• Do you want to own multiple residences (such as a duplex) to rent out to long-term tenants?
• Are you hoping to purchase a second home somewhere that you hope to retire one day?

Knowing what you want ahead of time will make a big difference when you go to buy!

Decide what market you want to buy in, especially if you plan to rent your property out.

3. Educate Yourself

Speak to other investors. While everyone's experience is different, finding someone to mentor you based on your goals can be incredibly helpful.

If you have someone in your network who has found success in investing in properties, ask them to sit down with you and learn what they did to succeed. Then, ask if they would be willing to look over your goals and budget and help you find a good place to start.

Understand the rules and regulations of owning multiple properties. This will depend on the type of property you own and can include things like renter's rights, tax laws, and needing different permits to work on properties, among others.

Knowing exactly what is required of you as a multi-property owner will give you peace of mind and help you decide what types of properties you want to invest in.

Know the risks associated with investing. The market can change at any time, so there is no guarantee you will make a profit on your investment when you go to sell. Educate yourself on the risks vs. the rewards so you can make the best choice for you.

Bottom Line

Choosing to invest in real estate requires secure finances, a higher up-front cost, and potential man-hours (especially as a landlord). It's also one of the safest ways to build wealth and potential passive income. It all depends on the decisions you make and the team you work with.

If you're hoping to diversify your financial portfolio through real estate investment in 2023, I'm here and ready to discuss your options!