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Janice France-Pettit: Diversify your portfolio with real-estate investment

Posted: May 14, 2010 3:29 p.m.
Updated: May 15, 2010 4:55 a.m.
 
With housing prices down and mortgage rates relatively low, now may be the time to consider diversifying your investment portfolio with real estate. You may wish to buy your first home, a rental property, a vacation home to use and/or rent or even a future retirement home.
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But how do you know you are making a wise investment?

"A key to success is building the right team of individuals," said Craig Cole, senior vice president and head of Union Bank's residential lending group. "It's smart to build a strong relationship with a real estate agent, appraiser, possibly a closing attorney and a lender."

Following is a review of some real-estate investment tips you may want to consider:

Rental properties
Success as a landlord means more than just collecting rent checks. View owning a rental property as an investment, and think of the property in terms of profit and loss.

Make sure to understand the monthly cash flow, including the amount of rent you can collect each month, and how much will be left over after mortgage payments, maintenance costs and other expenses.

Like other businesses, rentals are subject to supply and demand. If apartments are in short supply, you probably will not have trouble filling yours. However, if there are many, you may have to cover the mortgage some months without a renter.

Vacancies are a reality, so be sure to have enough cash to cover empty months.

Before purchasing rental property, talk to real estate agents and property managers in the area, and check the frequency of rental listings and the rent prices asked in the local paper.

Prepare for a commitment. Whether you are planning to handle the day-to-day operations or hire a company or individual to manage them for you, your time and money will be required.

Make sure you understand how much of each will be needed before investing. You will also likely need a reliable team to help with any remodeling and/or ongoing maintenance such as plumbing, electrical repairs, lawn service and cleaning service.

Vacation homes
As with a traditional rental property, the key to a vacation home investment is price. You may consider it a part-time vacation home for your family, or a future retirement home. During downtime, the rental income may generate additional cash flow.

Experts caution that rents are lower today and renters may be scarce, so if you are considering this option, you must be able to weather periods of non-rental and potentially negative cash flow.

Before you purchase a vacation home:

* Concentrate on properties that you can rent out year-round. Look for homes with the space and amenities to appeal to renters holding events, such as family and college reunions, weddings or business meetings. Big groups share expenses.

* Make sure you make a large enough down payment to reduce mortgage costs.

* Remember to factor in expenses such as insurance, maintenance, utilities, security and marketing.

The IRS considers a vacation home a business if your personal use does not exceed 14 days per year, or 10 percent of the number of days the property is rented out at fair market value - whichever is longer.

As a business, you must follow business accounting procedures and report rents as income. You may deduct expenses, including mortgage interest, property taxes, utilities and repairs.

Real estate may be an appealing investment option. Be sure to consider all of the factors involved before you make a decision to purchase and consult your banker, real estate agent and financial advisor.

The foregoing article is intended to provide general information about tax planning and is not considered financial or tax advice from Union Bank. Please consult your financial or tax advisor. Janice France-Pettit is a senior vice president and regional manager for Union Bank, overseeing the Simi Valley, San Fernando Valley and Antelope Valley regions. Her column reflects her own opinion and not necessarily that of The Signal.

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