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Should I Buy an Investment Property?

The revitalization of Memphis is creating huge opportunities in the income property segment of the housing market. Relative to other markets in the Southeast, Memphis has the lowest entry point--average $115,000 for a single family residence, as opposed to Nashville at $180,000 or Atlanta at $170,000. If you are considering buying investment properties, now is the time to jump into the market--prices are good, interest rates are still low, and strong metro economic trends indicate a stronger rental market.

Here's how investing in rental property benefits your bottom line.

Leverage Your Assets

When you buy stocks or mutual funds, you pay $20,000 for $20,000 worth of the investment, and hope the value rises as that money is dedicated to that one instrument. If the average return on the investment is 6% and that holds, in ten years it will be worth roughly $36,000 (add in compounded value), and then you'll owe capital gains taxes. It's not a bad way to manage your money, but consider how real estate compares.

When you buy a house, that same $20,000 can get you a $100,000 property when you take out a mortgage. A ballpark monthly payment on that $80,000 loan, including taxes and insurance, would be $650 monthly. If your tenant pays you $1100 monthly in rent, that's a gross monthly profit of $450. You should put about 5% into a vacancy account, and another 8% into a maintenance reserve account.

In a really simple calculation, assuming your property value appreciates 6% annually, based on current Memphis real estate data--that's $106,000 after a year. But unlike investing in the stock market, you'll have monthly income as well--a gross of $5400 on top of the $8000 increase in the house value, for a total of $11,540 as opposed to the $1,200 uptick in the net worth with a mutual fund. That is an 18 times better return on investment. 

After you have that first property for a couple of years, you can take the profits and increased equity of that first property and buy another--after that you're well on your way to building an empire.

Tax Advantages and Investment Properties

You'll certainly need to discuss the money pros and cons of investment properties with your accountant and financial advisor, but there are many tax advantages to being a landlord. You can write off your mortgage interest, just like with your primary residence, and income-producing properties have a number of other write-offs for depreciation, maintenance, commissions, and HOA fees, to name just a few. You will file a Schedule E with your 1099.
Streamline Your Management

Lots of potential investors are really excited about the math--but shy away from the perceived headaches of finding tenants, collecting rents, and managing the properties. That's why a property management company should be an integral part of the equation. Yes, hiring a management company will take a nip out of your bottom line, but consider these advantages.

  • Screen tenants, including criminal background, credit, and job history checks

  • Collect rents

  • Maintain property--unless you're really handy and have lots of time on your hands, you'll need professionals to handle maintenance.

  • Inspections

  • Safety

  • Lease addendums, terminations, and evictions
     

As a landlord, you have fiduciary responsibilities to your tenants to provide a habitable living environment. A large part of that responsibility is handling repair and maintenance requests in a timely manner--within 24 hours, seven days and nights a week. This means if you're at dinner and a pipe bursts, you've got to find a plumber on a Saturday night and probably get a to-go bag. For a vacation, you'll need someone to manage calls if you're unreachable.

A property management firm lets you enjoy your life, without fear of missing your flight because you've got to replace a dishwasher. They'll take care of the life cycle of a lease, from pre-screening tenants to handling move-outs or, if the worst happens, evictions. They also have professional maintenance staff so you're not paying the 24 hour roto-rooter guy in an emergency.

Reedy and Company has been in the real estate business in Memphis since 2006, and manages property in the Memphis area. Let us know how we can help with all your real estate needs.

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