Investing

Given the current favorable conditions for homebuyers, you may be considering buying an investment property that you can rent and/or resell.

On a national level, homes generally appreciate about four or five percent annually, although it fluctuates from year to year. Even with the depreciation the market has experienced in the last 12 months, real estate is still one of the most sound and safe investments you can make—if you think long-term. The longer you’re willing to hold on to the property, the higher your return is likely to be. The average home appreciation of 5% per year may not seem like much compared to long-term investments such as treasury bonds or bills, but consider this:

•    Your return on investment (ROI) is based on the total value of your home, even though you’ve only initially invested a down payment. In other words, let’s say you purchased a $500,000 condo. Your first year’s increase in value would be $25,000, against a 20% down payment of $100,000. That’s a 25% return!

But let’s not forget that you’ve made mortgage and tax payments in the meantime. Since the interest on these is tax deductible, and you’re mostly paying interest during the first 20 years of a 30-year mortgage, the government is essentially subsidizing your home purchase. The end result: your rate of return when buying a home is higher than most any other investment you could make.

•    While your property is appreciating in value, you’re generating rental income that’s helping to cover your monthly mortgage, taxes, and maintenance.

•    Investing on improvements to your property, such as upgrading a bathroom or kitchen, increases the value of the home—sometimes by as much as five times the improvement cost. It also allows you to demand higher rent and cover a large portion (if not all) of your monthly payments.

•    Unlike stocks or bonds, an investment property is a usable and tangible asset. You can choose to live in it yourself or allow others to reside there.

Which Properties Make Worthwhile Investments?

Here are some key factors to consider when deciding on what to buy:

•    Location: This is perhaps the most significant factor, especially if you plan to generate rental income. If you’re catering to NYC commuters, then you want a property with easy access to NJ Transit trains and busses, along with close proximity to things like the PATH train, Light Rail, or the NY Waterway ferry.

•    Size: A single professional could probably make due with a nice studio or one-bedroom, while couples, families, and parties of two or more roommates are going to need more space. Think about the type of tenant/buyer you are going to attract to your property.

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