Selecting the Ideal
Investment Property
Contents
ROI is waiting in the wings ...........................................................................................01
Understanding your funding options ............................................................................02
Assessing the area ......................................................................................................03
Estimating rental yield .................................................................................................04
Knowing the potential tax benets ...............................................................................06
Finding and managing the perfect property .................................................................07
01
ROI is waiting in the wings
A well-chosen investment property has great
potential for long-term personal prot. Rental
income, capital gains and tax benets all represent
possible sources of return on investment.
Like any investment, though, real estate
requires careful consideration of the sources
of risk, as well as the many cost centers that
affect ROI. Investors will need to make big
decisions, such as whether a commercial or
residential investment property is better suited
to their situation. They will need to assess the
prot potential of a property based on location
and condition, and understand ways they
might offset some of the operating expenses.
These and other factors may be especially
overwhelming for the rst-time buyer.
However, with the right knowledge and
preparation, even novice real-estate investors can
yield ROI. The best place to start is to know what
details matter the most when choosing your new
investment property.
Rental income, capital gains and
tax benets all represent possible
sources of return on investment.
01.
02.
03.
02
Before delving into the criteria for property
selection, it’s worth assessing the three crucial
realities of nancing an investment property:
Investment properties typically require a
minimum down payment of 20 percent,
according to Investopedia
®
. This is
signicantly higher than the minimum 3.5
percent on FHA loans for personal properties,
the reason being that mortgage insurance is
unavailable for investment real estate.
Interest rates also tend to be higher for rental
property mortgages, so a down payment
greater than the minimum 20 percent will be
benecial to buyers in the long term.
Many real-estate investors already own
personal property, meaning they’ll likely
need a second mortgage to fund their rental
property. Accordingly, lenders expect a
glowing credit report. For context, the average
minimum FICO credit score for a rst-time
homebuyer is 620, according to NerdWallet.
The bar is much higher for borrowers on
a second mortgage, with many lenders
demanding 740 or higher for the best rates.
Understanding your funding options
03
Selecting the ideal investment property is all
about location. Consider these factors when
assessing an area you would like to buy in:
All of these will in some way affect your
potential earnings.
Certain land is only usable for particular purposes
(e.g., residential, commercial, industrial or agricultural).
Assessing the area
Zoning districts: Certain land is only usable for
particular purposes (e.g., residential, commercial,
industrial or agricultural). This distinction is especially
important for investors interested in renting out
commercial properties to businesses.
Neighborhood: Crime rates, local school districts
and curb appeal are all good indicators of whether
or not someone would want to rent in a certain
neighborhood, according to Forbes
®
.
Price-to-rent ratio: This is the price of the property
against the average rent. Comparing the average
monthly mortgage, for instance, against average rent
may help you get an idea of profit potential in that city
or neighborhood.
Property taxes: They tend to be higher in cities and
the surrounding areas.
Insurance rates and requirements: Rates may vary
by location, as may insurance requirements.
04
Investors will need to estimate their net
operating income (NOI) before applying for
a mortgage. They can do this by first adding
up revenue sources (e.g., rental income and
capital gains after selling a property).
Next, they will need to calculate the sum
of all potential operating expenses for that
particular property:
Estimating rental yield
Maintenance.
Property taxes.
Capital gains taxes.
Management fees.
Insurance.
Utilities.
Other expenses, such as legal.
They can do this by rst adding up revenue sources (e.g.,
rental income and capital gains after selling a property).
05
Total revenue will then need to be subtracted
by operating expenses.
Example: $100,000 (in revenue) - $60,000 (in
operating expenses) = $40,000 (in NOI).
Note that NOI doesn’t factor in income or
capital gains taxes. An ideal investment
property has a positive NOI.
Lenders will crunch the numbers before
approving a loan, meaning borrowers can
probably save some rejection by doing the
math before applying for a mortgage.
06
Rental properties are subject to capital
gains taxes of up to 20 percent on sale
profits, according to NerdWallet
®
. Rental
income is also taxable. However, many
operating expenses can be deducted from
the latter source of income, including:
Finally, pass-through deductions may entitle
rental property owners to a business-income
tax deduction of up to 20 percent, according
to Forbes
®
. This benet applies specically to
sole proprietors, LLCs and S-corporations.
Knowing the potential tax benets
Employees and contractors (residential
managers, carpenters).
Interest on your mortgage.
Utilities.
Maintenance and repairs.
Travel to maintain the property.
Property taxes.
Insurance.
Advertising.
Improvements to the property that will
depreciate with time (new countertops).
Pass-through deductions may entitle rental
property owners to a business-income tax
deduction of up to 20 percent.
07
For additional guidance and more information about investment
properties, contact Comerica Bank.
Finding and managing the perfect property
A few additional factors that need to be
considered when thinking about buying a
rental property include the following:
Investors who do their due diligence
usually have the best sense of their risk
tolerances and financial capabilities. More
importantly, they’re more likely to end up
with an investment property that can act as
a reliable source of income.
Commercial properties typically have higher
returns than residential properties, but they
come with more risk, according to SmartAsset
®
.
Amenities (e.g., in-unit laundry, doorman,
parking) and comparable pricing (renters’ prices
in the surrounding area) will affect your potential
for rental yield.
Regardless of what property you choose, as
the landlord you will be responsible for nding
low-risk tenants and managing them, or paying
someone to do that work for you.
Comerica Bank
Member FDIC
Equal Opportunity Lender
Equal Housing Lender
This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, compliance or accounting advice.
You should consult your own tax, legal, compliance and accounting advisors before engaging in any transaction.
This article is provided for informational purposes only. While the information contained within has been compiled from source[s] which are believed to be reliable and
accurate, Comerica Bank does not guarantee its accuracy. Consequently, it should not be considered a comprehensive statement on any matter nor be relied upon as such.
Sources:
https://www.investopedia.com/articles/investing/090815/buying-your-rst-investment-property-top-10-tips.asp
https://www.nerdwallet.com/blog/mortgages/whats-exact-credit-score-need-buy-home/
https://www.forbes.com/sites/forbesrealestatecouncil/2017/09/11/seven-things-to-consider-when-buying-an-investment-rental-property/#5cc9a01e6dad
https://www.nerdwallet.com/blog/taxes/capital-gains-tax-rates/
https://www.forbes.com/sites/forbesrealestatecouncil/2018/07/05/unpacking-the-new-tax-reform-crucial-changes-for-real-estate-investors/#334908a774f9
https://smartasset.com/investing/should-you-invest-in-commercial-or-residential-real-estate
