With rising rents in the Denver area, owning an investment property could be an attractive venture. Here are some pros and cons to investment properties.
A pro to investment properties is that you can deduct property tax, mortgage interest, and mortgage interest (if applicable) on your yearly tax filings. However, you will have to claim the income you receive from rent on your taxes. This could potentially negate any benefits of those additional deductions.
If you will be financing an investment property, most bank will require a larger down payment if you already own a home or other properties. When banks look at your financial records, they will look at your debt-to-income ratio to assess whether you can afford this additional property. If your debt-to-income ratio is high, they may require a larger down payment on the property.
Where to Buy
When considering an investment property, one of the most important factors to consider is the location of the property. Not only do crime, convenience, and local schools influence your property’s rent, but you also need to consider your distance from the property. Do you want a local Denver property that you can easily travel to and manage repairs or tenant issues? Or would you like a vacation destination which you could use while vacationing and also may command a higher rent, but would require you to hire a local property manager? These are considerations that you need to realistically think through.
Like all homes, investment properties run the gamut of fixer upper to move-in ready. If you by a property that needs work – will you have enough cash on hand to repair and renovate up to local rental codes? Also, will you be able to handle repairs or will you need to hire a professional? This will greatly impact the funds you will need to maintain and repair the property. And as a landlord, you are legally responsible for providing a safe and up-kept home for your tenants.
Rent vs. Mortgage
Before buying an investment property, you need to have a very good idea of how much you can charge for rent. Check out the local area and see what other properties are renting for. Also, check to see how many other properties are available for rent in that area – if there are many options, that could mean the market is oversaturated with rental options and you will not be able to rent your property for top dollar or struggle to find a tenant.
Some landlords opt to find tenants on their own using platforms like Craigslist, HotPads.com, and even Zillow. However, this can take a lot of time and expose the landlord to the risk of violating rental laws that they may not know about. A landlord can work with a property management or realtor to find tenants, however, they may charge a fee (usually one or two months rent). A property manager can also handle rent collection and coordinating property repair, however, using a property manager will eat into your potential income.