The following is the first in a three part series on Investing in Real Estate, by my Associate, Zarah Walpole. Thanks Zarah!
Real estate is hot right now. I have many clients purchasing a second property for recreational and investment purposes. I’m a real estate lawyer so, of course, I think property can be a great way to hold and grow wealth. However, it is also an area that you should enter with your eyes wide open and an awareness of the many pitfalls that can await the unwary.
Financing
First, you need to fully assess how you will finance the purchase. Different considerations come into play when mortgage companies consider properties that are owner occupied, a pure investment, leased to a 3rd party or a combination of the foregoing. Don’t assume your financing options are the same as when purchasing a home. When assessing whether you can afford your carrying costs, don’t forget to include costs such as property taxes, insurance, and maintenance fees, etc.
First, you need to fully assess how you will finance the purchase. Different considerations come into play when mortgage companies consider properties that are owner occupied, a pure investment, leased to a 3rd party or a combination of the foregoing. Don’t assume your financing options are the same as when purchasing a home. When assessing whether you can afford your carrying costs, don’t forget to include costs such as property taxes, insurance, and maintenance fees, etc.
Tax Implications
Also, make sure you understand the tax implications related to the income earned while holding the property and the role of capital gains or losses when you the sell the property. For example, unlike the family home, the capital gains exemption will not apply. Consulting with an accountant to understand the tax implications and with a lawyer to determine if the property should be held personally, in a trust, or by a corporation can be an extremely important part of maximizing your return on investment.
Also, make sure you understand the tax implications related to the income earned while holding the property and the role of capital gains or losses when you the sell the property. For example, unlike the family home, the capital gains exemption will not apply. Consulting with an accountant to understand the tax implications and with a lawyer to determine if the property should be held personally, in a trust, or by a corporation can be an extremely important part of maximizing your return on investment.
Stay tuned for more on Investing in Real Estate, including renting and zoning issues!
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