So You Want to Own Rental Property

HOUSES! Magazine-September 2011 Tom Bolt

In today’s rapidly fluctuating market, investing in stocks and bonds may not be the best investment. Owning rental property can be a far superior investment during periods of economic turbulence. Currently, throughout the Virgin Islands, the residential and commercial real estate markets are stable and show great potential for growth. Although this market may fluctuate, the combination of population increases, strong demand for rental property and financial inflation makes buying the right investment property an excellent way to build equity and make a profit.

The attractiveness of turning a healthy profit through the use of investment property hinges on the concept of leverage. The term leverage is used to describe the process of controlling a property through the use of financing versus owning a property outright by making a cash purchase. For example, if on one hand, you buy an investment property outright for cash at $100,000 and we assume a 6% increase per year, then your rate of return on $100,000 is only $6,000. Aside from a low return you have also effectively tied up some, if not all, of your liquid assets in the purchase. On the other hand, consider the same property purchased using financing and assume the rental payments cover your loan payments. Using a 20% down payment, you have made the same $6,000 in appreciated value, but this time using only a fifth of your liquid assets to effectuate the same purchase. In essence you have made a 30% rate of return versus a 6% rate of return. It’s for this reason that investment property is an extremely profitable vehicle for holding real estate.

Yet before you go off and running to acquire your first piece of Virgin Islands investment property consider the list of items below:

– Make an assessment of your financial goals.

– Will you manage the property in addition to being an owner? If you plan on hiring a property manager, factor the cost into your expenses (typically 6%-10% of the purchase price).

– Choose the kind of property you want. Residential property is generally less expensive than commercial property because of pure size, but generate less income. Residential property, on the other hand may require more upkeep.

– Find a real estate agent who specializes in commercial or income-generating properties.

– Choose property where there is strong demand. There’s nothing worse than owning an investment property without any renters.

– On residential property, research if there are applicable homeowner’s association restrictions on renting the property.

– Have the property inspected.

– Search past records for vacancy rates over the last five to ten years as well as at present. Long-term residents are valuable, but may also have been signed on at a lower rental rate.

– Do your due diligence on potential tenants up front using credit checks and references!

You should also consult an attorney experienced in real estate and tax matters to help you take full advantage of any tax breaks the law may offer as well as determining the most profitable way for you to hold the property. Good luck.

Tom Bolt is Managing Attorney of BoltNagi PC, a full service business law firm based in St. Thomas that includes within its practice a concentration in commercial real estate, corporate, borrower and lender representation and real estate development.

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