Real Estate investing is a very popular form of investment, despite the obvious risks involved. These include the limited liquidity relative to other investments, the high amount of capital involved, and the fact that is highly cash flow dependent. The latter problem is the most likely to cause failure, coming about when a real estate investor goes into negative cash flow for an unsustainable period of time, forcing him or her to resell the property at a loss.
Despite the obvious challenges, the financial rewards can be very enticing, provided you put in place a plan that will maximise your investment results. Some factors which need to be looked at by the investor include the structure of the purchase, property choice, investment finance, negative gearing, and capital gains tax. Taking all these into consideration will benefit your investment and lead you on the path to financial success.
The structure of the purchase is the first thing you need to consider when buying real estate. That is, who will own the property. This might be considered simple however there are many consequences in regards to tax and liability based on how the purchase structure is laid out. Should an investor purchase the property in their own name? Or jointly with their partner? Or with a number of people? Or as a company or trust? If you are purchasing a property with numerous other people, it might be worth considering buying it as a trust, so you can distribute the income generated to all the investors.
Individual ownership is the most common and simplest form of ownership, however it is also the least flexible when it comes to tax. Because of this, individual ownership should be limited to the family home. If you are looking buy real estate as an investment property, it is probably worthwhile not going with this approach. A
real estate Portland agent once told me, if the property is going into your name, you better be living in the place!
Sometimes investors buy real estate in a partnership with friends or other associates, however a number of tax restrictions are also applicable in these cases. Therefore a partnership also needs to be considered in some circumstances. Buying property as a company also has downfalls, such as minimal asset protection, as legal action can be taken against both the individuals and the partnership if problems arise.
A trust is the most flexible ownership structure for property investment whereby a trustee holds legal ownership of the property, on behalf of the beneficiaries. This means the people buying the real estate do not own it and any action against the individuals will not have an effect on the property. It also means both capital gains and income can be distributed to the beneficiaries.
Once you've organised the structure of the real estate purchase, you need to choose a property to buy. This decision should take into account both short term and long term plans. You may want to buy a small unit and live it in for a few years before using it as a rental property when you move into a full size home. Buying a property in a coastal town such as Portland can be used as a rental property with the idea of moving into it in retirement.
In terms of making a solid return on your investment, you can't go wrong buying something with a strong rental return with tax benefits, in an area with high capital growth, and close to all the necessary amenities. Buying something "scarce" will ensure that it becomes sought after and attracts a high price.
Getting your finances sorted for the investment is another important issue. An investment loan is often pricier than a home loan and may require you to use equity from your home as security. Choosing a fixed or variable interest rate can also effect your finances, and you should look into the likelihook of interest rates rising or falling sharply in the near term.
Any investment strategy should take a lot of planning and discussion. Before making any decisions, ensure you think through things carefully and examine all options.
Source: Article Trader
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