5 Things to Know Before You Invest in Real Estate

5 Things to Know Before You Invest in Real Estate
August 28 15:21 2018 Print This Article

Making multiple types of investments is beneficial if you want to keep a diversified portfolio that gives you a huge earning potential. Real estate investments are often a safe bet because they give a person an ongoing income. Before settling on the right real estate, there are several things people looking to invest should know to ensure it’s the best decision for their financial situation.

A Land Trust is a Safer Option

A land trust allows a person to become a trustee of a piece of land. They hold ownership for the time being until it is later transferred to the true beneficiary. This prevents the beneficiary from losing their land completely and allows them to mask ownership for a time until it is safe to reveal. Not all states have the same laws on land trusts, so it is important to look into your state’s specific laws concerning this option and how it works. Investors are able to put their properties into a land trust and avoid creating an LLC that would require a hefty transfer tax. 

Short-Term Rentals Bring in More Income

Most landlords offer long-term rentals only. They want an individual or family to come in and stay at the property for an entire year, guaranteeing a full year’s worth of rental payments. This amount needs to stay at a fixed price that is paid each month. Though this does provide a steady income, there is a way to earn extra. Short-term rentals have the potential to bring in even more money because the rental price can increase between renters. One person may rent the unit for a cheaper price in the winter months when the property isn’t in such a high demand, while another pays a higher price in the summer months when the property may be seeing more use. Investing in vacation rental properties can prove to be highly beneficial. 

Residential Vs. Commercial Vs. Industrial

Knowing the difference between the various types of real estate investments you can make is also important. Don’t invest in a residential home if your plan was to find commercial property only. Residential, commercial, and industrial properties are all available to invest in but choosing which one depends on what goals you were hoping to meet. They all have their own advantages, but each has certain drawbacks as well. Industrial and commercial investments require a larger initial investment cost, for starters.

Real Estate Investment Trusts

A person does not have to invest in real estate and manage the property themselves. There are Real Estate Investment Trusts, or REITs, that allow a person to trade similarly to stocks. You earn dividends, which are taxed differently than rental income. This option has a much lower risk factor and the potential for higher returns. 

Reporting Your Investments on Your Taxes

The money a person makes from their investments needs to be reported come tax time. You need to be aware of how to disclose this information properly and keep track of records so all data gets included correctly. If you own a rental unit and are receiving rent from tenants, this information will need to be provided to the IRS. You must fill out Form 1040, Schedule E. Report income and also be sure to list your expenses, such as what you spend maintaining the property or making repairs. All income, earned or otherwise, needs to be reported in some way, as most of it is taxable. 

Investing in real estate may seem tricky, but by learning and understanding some of the important key points to the process, investors can have a better idea of how doing so can be beneficial for them. Learn all you can about investing in real estate before making your investment decisions. It will ensure you make solid moves to increase your profits.

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