Turning Your Home into an Investment Property
Some people may be looking to turn their home into an investment property to generate income and offset other living costs. Olympia is a market that is perfect for developing properties for investment. However, there are a number of factors to consider before making this decision, including the market conditions, the cost of maintaining the property, and your financial situation. While there is potential for profitable investment returns, it is always essential to make sure you know the risks going into an important decision like this.
To address these issues, we sat down with agent Tim Lynch, who talked about why investment properties can become incredible revenue generators, the risk factors to be aware of, and the future of investment in Olympia.
Q: Should people even consider investing in property to begin with?
A: It all comes down to what is your ultimate goal. Do you want to be a landlord? Do you want to have investment properties out there generating cash flow for you, gaining additional equity for you? And that's one great way to take your primary residence and move out of that and turn that into a rental property is if you have lived in your home for two out of the last five years, you can write off your capital gains for that tax-free. So as a single person, you can gain up to $250,000 and $500,000 as a couple tax-free. So again, if you lived there for two out of the last five years. So if you lived there for two years, rent it for the next three, turn around and sell it. And if you have $250,000 worth of equity gained in that home, you can take that income as tax-free.
Additionally, over those last three years as a rental property, you have significant tax advantages, your depreciation, you have your write-offs for any maintenance or repairs you do to the property, and then also, obviously, someone is paying your mortgage down for you over that timeframe as well.
Q: What about duplexes? Is it a bright idea to rent out one side and live on the other?
A: If you're living on one side, you can rent out the other side right away and help that tenant pay your mortgage for you. Keep in mind that if the toilet leaks, the sink leaks, or the faucet needs to be replaced, that's on you unless you hire a property manager, then they can take care of all that for you. They can take care of the collection of the rent, take care of security deposits, and any repairs. So again, going into thinking about things a little bit ahead of time, do you want to be the landlord yourself, or do you want to hire somebody to do that for you? So depends on each person's differences. I employ a property manager to keep my time at home with my family. But it's whatever everybody wants to do.
You could always start as the property manager yourself and see if you like it, and then if you don't, transition into hiring somebody to manage the property for you. But it all comes down to personal preference in what you want to do with your time.
Q: What type of property do you think makes a good personal investment property?
I think every different type of property has its own pros and cons. You can have a two-bedroom, one-bathroom house, a smaller home, so smaller flooring to replace, smaller amounts of walls to paint, a smaller kitchen, obviously a smaller rental amount for those properties, and a smaller purchase price. So again, it all comes down to what metric you use for a successful investment property. Are you using cash on cash return? Are you using the internal rate of return? So equating your equity position in the property, the equity growth, and the mortgage buy-down. So again, it just depends on how you view your investment properties and how you view them as successful.
Q: What about AirBnB, VRBO, or short-term rental properties? Do they work in Olympia?
Olympia is a fairly decent market for that. Through your summer months, you have your traditional AirBnB-type daily, weekly rentals that you talked about. The other component that Olympia has is we have the legislative session. You can use your house for a midterm rental for two or three months at a time. We have lots of traveling nurses for our hospitals around here, so that's another avenue that you could utilize a less than one-year term, the midterm rental, we would call those as well.
Consider everything when it comes to Airbnb short-term and mid-term rentals. There are a lot more things to consider, but there's certainly a high opportunity for larger cash gains monthly doing it that way.
Q: Should homeowners use their current home as an investment property or find a different one to invest in?
Your existing mortgage is going to be conceivable, I shouldn't say it is, but most likely, it's lower than current rates. So by turning your current home into an investment property, you have a lower interest rate on that home right now than you do on something if you bought new right now. But if you're looking to buy something new for an investment property, I mean, interest rates have stabilized. We've seen them even decline a little bit here recently, so hopefully, that trend continues.
Prices are coming down, and buyers have some more negotiating room to get repairs, concessions towards closing costs, price reductions, and things of that nature. So the market is definitely shifting to becoming more of a neutral, or potentially even buyer's market right now to where you can find those investments out there.
No matter what, real estate remains an excellent investment
So real estate, you have that control. You can update the house to appreciate it yourself, so you can maintain ownership of the property and your investment, versus just investing in some fun somewhere.