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What is an Investment Property?

An investment property is any type real estate purchased with the intent of leasing to a 3rd party(ies) in order to earn a return. It is not uncommon for an investor to purchase a building with existing income in all or a portion of the space. Many investors are seeking a “value add” which means they value the income that is in place, however, prefer the ability to make some improvements to the facility that would generate a higher rate on the vacant space and increase the overall return. There is also the option of buying a property with a short-term investment in mind. “Flipping” becomes popular in a constricted market but can be very risky as markets can turn quickly. It is important to determine your investment goals and appetite/budget for risk before you buy your first property.

Do Your Homework

Understanding the swings in the market takes time and research. The real estate market is often cyclical in nature so knowing when to buy (and more importantly when to sell) is a critical to your success as the investor. In addition, property use often has a significant impact on its value. Knowing the properties highest and best use, current zoning, location, vacancy rates and historical values of properties in the area all factor into getting the highest rate of return. It is always best for an investor to build a relationship with a great local Broker to ensure they are weighing all the market factors when buying/selling an investment property.

Understanding All of the Costs

As a new investor, it’s easy to fall into the trap of poor cash flow management and under capitalization of a project. Prior to investing it is always smart to seek the advice of a professional such as an accountant or real estate broker to ensure you know exactly what you are getting into financially. In most cases projects take longer than expected and have budget overruns. Also, it is important to take into account a realistic time period for acquiring a tenant(s). Make sure to budget for “carry costs” for a realistic period of time. Determining how much income your investment will generate, what happens if there are any vacancies and what are “worst-case scenario” shortfalls that could arise are key steps that should not be overlooked.

Reporting Your Investment Earnings

When an investment property generates income, that income needs to be reported on your tax return. However, the Internal Revenue Service (IRS) will allow you to subtract any relevant property expenses such as property repairs, management fees or lawn maintenance costs from this amount. An accountant will assist you in determining what type of corporate structure is best for your situation. The type of structure you select and the amount of time you hold the property will be important factors in determining how revenue and taxes will be calculated.

Indiana is the 4th Best State in the nation for economic opportunity.

Eddie Bradley, CCIM/CPM/SIOR has some more information below on Investments and Opportunity Zones

Investments and Opportunity Zones

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