Investing

How to Approach Buying Your First Investment Property

house

You’ve probably heard that investment properties can provide a stream of passive income. While that may sound like easy money, there’s actually a lot of work involved in property investments. Before diving in headfirst, find out what you should do below.

Consider the Work Involved

Owning an investment property takes just as much work, if not more, than having your own home. If you choose to rent out the property, you’re responsible for covering just about everything a landlord covers when they rent out an apartment. If you aren’t prepared, the amount of work can quickly overwhelm you.

For that reason, many investors choose to hire a professional management company. A good company will offer local support whenever you need it, in addition to handling every aspect of running the property. By outsourcing your management, you don’t have to worry about routine home maintenance and dealing with tenants.

Beef Up Your Savings

If you currently have your own mortgage, then you already know how expensive it is to own a home. Even though you hope your investment property will generate some extra income, there are still a lot of expenses.

To start, you have to make a substantial down payment. Lenders usually want at least 25 percent down, which is a lot more than the standard 5 percent minimum for primary residences. So if you’re buying a second home in White Plains, you could easily have to put down more than $100,000 with home sales averaging $462,000 in the area.

If you have the cash needed to buy a home outright, you won’t need to worry about financing the purchase. However, there are still operating expenses. It’s a good idea to build a strong financial cushion to cover things such as routine maintenance and unexpected repairs. Having a good budget and a strong understanding of your cash flow is critical.

Start Small

It’s all too easy to bite off more than you can chew with your first investment property. For example, buying a home that needs major repairs can seriously hamper your ability to make money quickly.

There’s no rule against buying a fixer-upper for your first investment, but you have to think about how long it will take to get the home move-in ready. According to the House Flipping Academy, it can take three months to fix cosmetic repairs throughout the whole house, and up to one year to do a complete renovation. Consider the fact that you’ll be missing out on any potential rental income for that period of time. When you’re just starting out, it might be better to get a home that only needs one or two updates.

Choose a Property Wisely

When picking a home, be sure to think about your long-term goals. Will you hold onto it until you can sell it for profit? Or will you rent it out to families or vacationers? There are pros and cons to each decision. A residential rental property will need to be located in a neighborhood that attracts families or young professionals. A vacation property, on the other hand, should be in an area where people are going to actually want to book short-term rentals.

If you’re thinking about getting a vacation property, be aware that some cities are cracking down on the short-term rental industry. Always check local regulations before making a decision. And keep in mind that laws may change, potentially killing your idea for a successful short-term rental property.

If done right, property investment can be incredibly profitable whether you choose to rent out the home or sell it for profit at a later date. By having enough financial cushion, having a management plan in place, and choosing a property with a lot of potential, you’ll greatly improve your chances of success.

6 FAQs About 529 College Savings Plans

College is a large expense and one worth planning for, especially if you want your future college graduate to start their lives with minimal debt. One common way to prepare for such an expense is to open a 529 college savings plan.

Photo by Ruijia Wang on Unsplash

Photo by Ruijia Wang on Unsplash

What is a 529 plan?

College savings 529 plans are state-sponsored savings accounts that offer both tax and financial aid benefits.

What states run a 529 program?  

Almost every state has a 529 program, each with different perks and benefits. You can pick based on perks and you don’t need to live in the state you opened the account in.

You can look at 529 plan options using this tool from SavingforCollege.com.

What are the two types of college 529 plans?

There are two types of 529 plans, they are:

  • College savings plans – This plan is similar to a Roth 401k or Roth IRA by allowing you to contribute after-tax income in the form of mutual funds and other types of investments. There are a number of investment options to choose from and the 529 account will go up and down and value according to those investment choices. The money is this account is available for tuition, books, and often housing.

  • College prepaid tuition-  This plan can be used to pre-pay all or part of the costs of an in-state public college education. Sometimes, they can be converted for use at private or out-of-state colleges.

What are the perks of using a 529 savings plan?

Each state provides slightly different incentives for its 529 programs. But some of the overall benefits include:

  • Large income tax breaks (for federal and often state taxes)

  • The donor stays in control of the account until its use

  • They’re low maintenance

When can you start them?

You can start one of these savings plans at any time. Most 529 programs are “set it and forget it” meaning the investments come straight out of your paycheck or bank account.

Where can I learn more about college 529 plans?

There are a lot of online resources for comparing and ranking different 529 programs. You can reference one of these, or reach out to your friendly neighborhood tax professionals. We can help you select the best option for you.

*Contact us here*

4 Ways to Pay Less Taxes on Your Investments

If you’re considering jumping into investing (or have already started), you need to know the tactics to avoid paying massive amounts of taxes on them. We’ve compiled a list of tax tips for investors. Check them out.

by Austin Distel

Hold investments for longer than a year

Whenever you make money off your investments (aka capital gains) you are taxed on that income. However, the length of time you held the investment dictates the rate you’ll be taxed at.

These taxes, called capital gains taxes, change at the year mark. If you hold your investments for a year or less, you’ll be taxed at the short term capital gains rate, which is the same rate as income tax.

But if you hold your investments for a year and a day, you’ll get taxed at a more manageable long-term capital gains rate.

This rate can get as high as 20% for big earners, but it’s more likely you’ll pay somewhere between 0 and 15%.

Buy Municipal Bonds  

Buying bonds means you get to collect interest on those bonds, which is a great source of passive income if you buy enough.

But unless you buy municipal bonds, the IRS is entitled to a share of that interest. When you buy either city, state, or county bonds, you are exempt from paying federal income tax on those bonds. If you buy municipal bonds in your home state, you’ll be exempt from state and local taxes as well.

One thing to note is that if you sell your municipal bonds for a profit, you’ll have to pay taxes on the gain.

Sell Losing Investments   

If you’re losing money on a particular investment, you might want to consider selling it off.  Investment losses offset capital gains, so if you make $2,000 and lose the same amount, you won’t have to pay on the amount you’ve lost.

In addition, if your investment losses exceed your gains, you can use them to offset up to $3,000 in taxable income.

Put Your Money in Tax Sheltered Accounts  

Putting your investment money into tax-sheltered accounts is a great way to defer paying taxes on various investments.

Accounts like 401(k)s, 403(b)s, and certain IRA plans aren’t tax-free, but you won’t have to worry about paying taxes until you start making withdrawals. By the time you do that (barring some emergency), you’ll likely be in a lower tax bracket anyway.

 

Have more questions about investments and taxes? Shoot us an email or give us a call.

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.