In contrast with the volatility of today’s stock market, today many investors are drawn to the relative stability of purchasing real estate in Colorado.
When purchasing a piece of real estate – whether for personal use or for rent – investors are looking for big returns for themselves and their family in the future.
Real Estate Investment Defined
In general, “investment” refers to the act of putting your money into a financially profitable venture in order to see it grow into more cash in the foreseeable future.
With real estate investment, you buy a new house, apartment building or town house, or build a commercial or industrial property which you offer for rent or lease to tenants and business owners.
The money that you earn through rent and other services that you provide on your property should not only be sufficient enough to cover the costs of renovations, maintenance, and taxes; you need to see a profit or a return on your investment once all these costs have been deducted.
Real estate investments in Colorado fall into six major categories, which are as follows:
1) Residential Real Estate Investment
Houses (including vacation houses), apartment buildings and townhouses which are rented out to people for a prescribed period of time based upon lease or rental agreements that have been signed between the owner and the tenant.
2) Real Estate Investment Trust (REIT)
These are companies that own and/or finance real estate that produce income. Much like stocks, you can invest and compile a full portfolio of real estate, without the hassles of actually managing the property.
3) Retail Real Estate Investment
Encompasses shopping malls and other types of retail properties. Not only will you collect on the lease of a space, you may be able to get a percentage from the sales of your tenant stores.
4) Commercial Real Estate Investment
Encompasses buildings that offer office space. Rent is paid by the tenant for the office space.
5) Industrial Real Estate Investment
This refers to facilities that offer specific services such as storage, Laundromats and car washes. Not only will the tenant pay rent, but you will also be given a percentage of the revenue generated by these businesses.
6) Mixed Use Real Estate Investments
These are establishments that combine any or all of the above categories in just one building. For example, a four story office may have a bank, café and restaurant on its ground floor. The next two floors may house office space and commercial facilities like small shops. The top floors can be designated as a residential area.
Real Estate Investment Basics
Investing in these categories follows similar basic skills and principles which are applicable to all, with the differences lying in the documentation that needs to be produced and the taxes and other costs that will be charged. We shall go through these basics one by one.
Determine/Monitor the State of Your Finances
First, examine the state of your finances. Unless you already have more than enough savings to pay for the property in full, you will need a mortgage.
Always check your credit status first. All mortgage companies inspect your credit status in order to determine your capacity to pay.
If you have low credit score and your credit history reveals that you have been remiss in making payments on your obligations, the more likely they will not approve the mortgage.
You can inquire with financial institutions in your area about their mortgages and which has the best interest rates that you can afford. Ask about fixed and adjustable rates.
Because you will be paying your mortgage for a number of years, you must anticipate the possibility of any emergencies and other unforeseen circumstances which may prevent you from meeting your obligations.
Early on, ask about penalties if you happen to miss payments on your mortgage.
Do Your Research
Next, check the following:
1) Fair market value of the property
Inquire about the renovations that have been done to the house and additional features such as swimming pools, Jacuzzis, etc. Get a sense of land value surrounding the property.
2) New developments occurring in the location of the property
You can expect the value of real estate to increase if there are major new developments going on within the area. Such developments would include new residences being built, setting up of new businesses, etc.
3) Neighborhood
Many real estate buyers prefer to live in a peaceful community with amenities, like grocery stores and recreational facilities, within the vicinity.
4) Inquire with the locals on the history of the area
If the location has been experiencing gradual development and improvements over the years, you can expect the value of your real estate to rise as well.
Always Compute the Flow of Cash on Your Property
Owning real estate comes with a number of expenses aside from the mortgage. These will include taxes, continuing maintenance, renovations, and other expenses.
Real estate experts recommend that property owners charge rent of 10 to 15 percent of the building’s value in order to offset management costs.
Look for Possible Tax Breaks
You may want to consider adding renovations and alterations to your real estate which may lead to tax breaks. Such improvements include installation/maintenance of air conditioning, water heating, and security systems.
Finally, be sure to talk with your tax professional about the pros and cons of real estate investing on your individual tax situation.
Good luck moving forward! Let us know how we can assist you moving forward with your real estate investment in Colorado.
