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Investing in Residential Real Estate

The pros of purchasing a multi-family property

Building your investment portfolio with a real estate purchase is a wise choice for those who are willing to stay with their investment over a period of time. Most experts recommend that you hold onto your property for 5 years or more to maximize its’ return. While there are few types of investment property types to consider for residential real estate, small and large multi-family units are the most common real estate investment options.

This article will focus on why you would want to consider purchasing a small, multi-family property as part of your investment portfolio.


Are multi-family properties a good investment in every market?

Multi-family property investments work well in most markets because of strong housing demand and rental income potential. It comes down to a mathematical formula – multi-unit properties allow you to capitalize on additional rental income that you wouldn’t have access to in a single-family unit. Most small multi-family dwellings include two to four units. Anything above four rental units starts to fall into the categorization of a commercial property which leads to a more complex set of rules for financing. Commercial real estate loans focus more on the experience of the buyer and the earning potential of the property making the acquisition process somewhat more difficult. Some additional reasons why a multi-family property can be a good investment in most markets include:

  • Bigger cash flows
  • A larger pool of tenants (less risk for the owner)
  • Scalability of your real estate portfolio

Education opportunities factor in where  to buy your investment property

Purchasing an investment property in a community that has educational opportunities like cities with a university are typically a good choice because of the high demand for rental housing. And, communities with college populations typically have a younger demographic, often with 75% of the residents under the age of 55  that commonly stay around after graduation to start their own business which brings in new jobs and further contributes to the health of the economy. These markets are ideal when considering where to purchase your small, multi-family property.

Tax Benefits

If you own an investment property, you have the opportunity to deduct certain costs when filing your annual income taxes. These can include:

  • Mortgage Interests
  • Business Expenses
  • Improvements/Repairs

Depreciation is also something you can benefit from as an investment property owner. The IRS assumes wear-and-tear on every building as time passes (depreciation of an asset). As a rental property owner, you have the opportunity to use this depreciation as an annual write off reducing your tax liability.

Living in your multi-family property

If you’re looking to bring your own housing expenses down you should consider purchasing a multi-family property and reside in part of the property and rent the other unit(s) out. This is an obvious benefit to you directly bringing down your mortgage payment and depending on the market even eliminate your payment completely by having your renters cover your mortgage payments. In this scenario you could also pay extra on the mortgage each month, allowing you to build your equity faster.

When purchased at the right time with low borrowing rates, multi-family properties can produce substantial cash flow while reducing your own mortgage while providing you with long-term tax benefits. Multi-family properties are a proven income-generating investment choice in most markets, particularly those towns with colleges or low vacant rates offering larger pools of potential tenants.

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How to Save for a Downpayment

  1. Get in the know. Like any good budget or savings plan, the first place to start is to determine where you are NOW in relation to your credit score, your monthly bills and assets. Contact a trusted mortgage professional to see how much home you qualify for and how much you’ll need to save to purchase your home. They can help you take a look at things like credit scores, loan requirements and interest rates now so you can be simultaneously doing ALL the things right during this savings period to ensure the most favorable rate and terms.
  2. Set a deadline. I know deadlines seem ominous to some, but they can be powerful motivators to accomplish great goals. (And buying a home is a pretty big goal!) Again, once you know where you are – it will make setting a timeline easier. For some, step one of the savings plan may be paying down or even off some past debt with high interest – which could back up your time table.

Click here to view our PDF detailing 5 more tips on saving for a downpayment!

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Cash Buyer Checklist

It’s a great time to buy! If you’re in the market for a home without the hassle of a mortgage and have wisely saved your money to pay cash for your next home or investment property, you’ve definitely got a powerful advantage in today’s market. However, just because you’re not subject to the same rules and regulations that are required from mortgage lenders – doesn’t mean you should just sign on any dotted line. To protect your rights and best financial interests – be sure to consult with a real estate professional and follow this important checklist:

Click here to view 11 must-check boxes as a cash home buyer!

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Questions to Ask Before Buying a Second Home

  1. How much will a second home cost? Besides sale price, you should factor in mortgage, property taxes, insurance, utilities and maintenance fees-and some of those expenses are probably higher than you think-plus up to 1.25 percent of the purchase price to cover annual maintenance and unexpected repairs. You’ll also need to budget 20 percent more for insurance than you pay for your primary residence; if you rent out your second home, you’ll also need medical and liability coverage.
  2. Can you truly afford a second home? You should only buy a second home after the rest of your finances are in tip-top shape. All of your mortgage payments-including the second home and remaining debt should consume no more than 36 percent of your monthly gross income. If you can’t make those numbers work, this probably isn’t the right time to spring for second home.

Click here to view the PDF that details 6 more important questions!

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Home Wiring

The type of wiring in residential homes generally depends on when the home was built, where it was built and if it has been updated. In the older homes, knob and tube type wiring was the norm, replaced later by encased plastic-sheathed wiring.

In most cases the newer plastic-sheathed wiring is copper, insulated with plastic and then wrapped with insulation and another layer of plastic for protection. Breaker boxes are another story; sometimes a well-meaning home owner can inadvertently make things unsafe.

It is always wise to consult a reputable home inspector and even an electrician before you buy. A little homework today can save you a lot of money down the road. more on home wiring is available here.

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Energy Efficient Windows

Single pane, double pane, thermo pane, triple pane windows, plain glass, leaded glass, low “e” glass, wired glass, and tempered glass, too. WOW – There’s a lot to know!

Some children have been known to shatter a window or two. Tempered glass can prevent this. Fogged thermal pane windows might need to be replaced if their seals are broken. New argon gas filled windows work well to insulate, while low-e coatings reduce the heat transfer for south facing rooms.

There is a lot of information available on the web, but this site seems to be one of the best ones out there. We will be happy to show you the different types of windows and glass as we show you around homes, so be sure to ask us.

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Thinking of Stucco

Many newer homes are now being sided with artificial stucco siding, or EIFS (Exterior Insulation Finishing Systems). This is essentially polystyrene foam with a base coat, reinforcement mesh, then another base coat and then a finishing coat of stucco over the top. This is a terrific product, as it adds insulation value to the home, not to mention classy looks. However, it can also be a serious and very expensive repair if it isn’t installed correctly and/or water gets behind it.

There are several manufacturers of artificial stucco, and many builders installing it. Having it inspected allows you to know if there is a problem, and even if there isn’t, you will be aware of the areas you need to keep caulked, and what to look for in case of trouble. Get more information on improperly installed EIFS by clicking here.

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Siding

When you are checking out homes, there are several items in our market you need to be aware of – including man-made siding. A lot has been said about L.P.( Louisiana Pacific) OSB (Oriented Strand Board) products, and they have borne most of the bad press.

But did you know that there can be issues not just with LP, but with Omni Board (made by Masonite) Stimson Fortestex, Weyerhauser and others? You need to know, Siding replacement can cost tens of thousands of dollars!

When the time is right, ask us about ASHI home inspectors and the benefits of making your offer contingent upon YOUR approval of a home / siding inspection where necessary.

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Plumbing Alert

You will spot several different types of plumbing systems in any housing market, including our own. Copper, galvanized, rigid plastic, polybutylene, and soft plastic are but a few. Certain systems are more prone to having certain problems.

Galvanized water pipe is most prone to rusting on the horizontal surfaces (such as under a floor) versus vertical surfaces (running up a wall) and it corrodes from the inside out. Some rigid plastic systems have been recalled, while others have fared very well.

The most reliable types seem to be made of copper, but again there can be issues to check: are the hangers plastic lined? Are there any lead solder joints? A good home inspector can help you identify any problem areas before you buy. There are several reputable inspectors in our area that I would be happy to refer.

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Lead Paint

All sellers with homes built prior to 1978 are required to fill out a lead-based paint disclosure form and provide you, the buyer, with a lead-based paint educational booklet in any sale. Lead is a highly toxic metal that was used for many years in products found in and around our homes.

Lead may cause a range of health effects, from behavioral problems and learning disabilities, to seizures and death. Children 6 years old and under are most at risk, because their bodies are growing quickly.

On the other hand, there are millions of homes with lead paint out there, and many have been painted and repainted several times so the lead paint is well covered up. If in doubt, have the paint tested and evaluated either at a local laboratory, or with one of the home test kits available at your local hardware store.

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Home Insurance

When purchasing a home, you will need to acquire homeowners insurance. In fact, all lenders will require a policy be in force prior to funding the loan. Make sure you have enough coverage, should anything happen. Policies refer to “replacement costs” that may not cover everything.

You should ask your insurance agent a lot of “what if” questions. The deductible amount also plays a big part in setting your premium. Higher deductibles lower the number of claims, and reduce your insurance costs.

Check with your insurance agent for more information on these issues, and any others. If you don’t have an insurance agent, we have access to several top-notch agents we can refer you to with confidence. A great online resource can be found right here.

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Insulation “R” Values

The most important thing to be aware of with insulation, other than the safety issues of urea formaldehyde and asbestos (covered elsewhere), is the R value, or the insulating factor. The higher the number, the better the insulator.

Don’t be too shocked if the insulation in the 15 year old home you are considering isn’t near the R value of a brand new home. While there is no question you could save on heating bills by adding more insulation, sometimes it can take many, many years to recoup the costs.

Often, gas or power companies have financial assistance programs including low interest loans or even grants available if you boost your insulation. Talk to your home inspector about any upgrade recommendations before purchasing your next home. More on insulation is available here.

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Home Heating Sources

Heating and cooling systems are some of the most important investments you’ll ever make in your home. Heating and cooling accounts for 44% of your home’s energy use. Various systems include electric, gas, propane, oil, and even wood-fired.

The method of distribution can be forced air, under floor boilers and pipes, baseboard, zonal, gravity, heat pumps, ceiling wires and, of course, wood stove and fireplace. Some have higher purchase prices, while others cost more to maintain or operate.

The more energy efficient an appliance is, the less it costs to run and the lower your utility bills. Use this knowledge to evaluate the asking price of any home. You’ll be money ahead as you factor its heat source into any offer! More information on heating is available right here.

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Asbestos Concerns

Many sales agreements mention asbestos by saying “the buyer is aware asbestos may be used in the construction of this home.” This can be a little unsettling. Asbestos is a known carcinogen, and when exposed, tiny particles can be released into the air you breathe.

Asbestos is a common insulator used in many homes, and was used for everything from siding to tape wrapping for furnace air ducts and even sometimes in “popcorn” ceilings. There are several remedies that range from the simple to the complex.

Your home inspector can tell you if asbestos is present in easily visible places such as siding, taping, and insulation, and recommend remedies if necessary. More information on asbestos can be found right here.

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Bozeman Brokers Real Estate

1745 South 19th Suite 2
Bozeman, MT 59718

406.587.5900
info@bozemanbrokers.com