In a way, any property you purchase could be considered an investment property. Even your primary residence, if maintained, upgraded, and bought and sold at the proper times, could earn you a tidy sum in the long run. Most people consider their home a major investment, if not their largest.
That said, when people talk about investment property, in particular, they’re generally considering properties that won’t serve as their primary residence. What, exactly, are investment properties and what do you stand to gain by purchasing such property in Hawaii? Here are a few things you should know before signing on the dotted line.
What is Investment Property?
Investment property includes any property you purchase with the intent of seeing return on investment.
This could potentially include your primary residence, since your end goal is probably to build equity over years and sell it at a significant profit. However, investment property more often refers to a property that will bring in some kind of rental income, whether you use it for commercial or residential tenants or you simply rent your vacation home out on Airbnb when you’re not visiting your favorite Hawaiian Island.
This is an important distinction, especially if you already own a primary residence, because purchasing a second property can be somewhat more difficult as you won’t necessarily have the same array of financing options available and you won’t have access to mortgage insurance. This means you’ll need a minimum down payment of 20%, and many lenders require at least 25%.
You may also need a good credit rating, favorable loan-to-value ratios, and proof of ability to pay for at least six months’ worth of expenses (i.e. reserves), although these factors will depend on your lender.
Benefits of Investing in Properties in Hawaii
There are myriad benefits to investing in property, especially in the beautiful Hawaiian Islands.
When you own a rental property, you can charge rent or lease it to cover your own expenses and then some, bringing in a passive income. If you hire a management firm, you won’t even have to deal with the hassles of being a landlord, such as collecting rent of arranging for needed servicing, maintenance, and repairs.
In Hawaii, in particular, the market tends to remain rather competitive since it’s such a popular destination for transplants and tourists. This means you may have the option to increase rent periodically while keeping your mortgage payments the same. Although markets go through highs and lows, if you can hang onto your property for several years and time a sale just right, you can also see significant capital gains.
You may also enjoy tax deferment upon sale of an investment property when you roll profit over into a similar property type. Another potential benefit is the option to use an investment property as your vacation home, renting it out for most of the year and then blocking out dates for your own visits.
Potential Drawbacks of Investment Properties
If you manage your investment property wisely, you stand to see significant ROI, but you also need to be aware of possible drawbacks. For example, what if you’re unable to find suitable tenants and your property remains vacant for an extended period of time? What if you’re unable to sell? You have to be prepared to cover costs in the meantime. If you’re an absentee landlord (i.e. you live in a different city or state), you’ll also have to shell out the dough for a management company, which can eat into your earnings.
Finally, there are tax ramifications to consider. Not only are you required to report earnings from rental properties and pay taxes on them annually, but you won’t enjoy the same mortgage interest deductions you receive for your primary residence.
How to Get the Most Out of Your Investment Property
If you want to get the most from your investment property, you really have to do your homework and plan ahead. You need to make sure you have the best opportunity to see ROI, and this means choosing your property wisely, calculating expenses versus potential gains, and being willing to hold out and hold onto properties over the long haul.
Don’t forget to factor in expenses like property tax, insurance, maintenance and upgrades, and the cost of a management company so you can price accordingly to cover costs and see profit.
It’s also a good idea to consult with professionals before purchasing investment property. Speak to your tax advisor about the potential ramifications of gaining income from investment properties. If you decide the gains are likely to outweigh the expenditures and you’re in a good position to make a purchase, your next step is to contact an experienced, local mortgage broker like Luminate Home Loans Hawaii. These professionals can help to ensure that you get a good deal on a suitable property by enumerating understand the options available to you and helping you lock in the lowest interest rates and the best loan terms for your investment property purchase.