Are you considering investing in real estate? Owning a rental property can be a rewarding way to earn extra income and build wealth. However, it isn’t for everyone. In this article, we’ll share what you need to know about buying an investment property in Texas including your options for property types, how to select an investment property, what to budget for, and more.
Choose Your Investment: Property Types
When it comes to real estate investing, there are a variety of property types to choose from:
- Single-Family Homes: Whether it’s a townhome, condo, or free-standing house, single-family refers to a rental property that only consists of one unit to be rented out.
- Multi-Family Homes: This includes duplexes (two rental units in the same building) and small apartment buildings with a maximum of four units.
Apartment Complexes: Anything larger than four units would be considered a commercial real estate property. The typical individual investor is usually not buying an apartment complex, but it may be possible to invest in one through a real estate investment trust (REIT). Talk to an investment advisor about your personal investment goals and portfolio.
You’ve probably heard the adage that real estate is all about location. Here are the other factors to consider when selecting your investment property:
- Location
- Local demand for rental units
- Condition of the property and surrounding area
- Size of property
- Available amenities
- Proximity to schools, stores, medical practices, etc.
- Risk of natural disasters such as hurricanes, flooding, etc.
Understand the Texas Real Estate Market
Texas has a diverse economy and a large range of industries, which makes it a good place for investment property opportunities. Major cities in Texas such as Austin, Houston, and San Antonio are quickly becoming desirable locations for young professionals, especially in the technology and healthcare industries. Average rents include:
- Austin: $1,500/month for a one-bedroom and $1700 for two bedrooms.
- Houston: $1100/month for a one-bedroom and $1300 for two bedrooms.
- San Antonio: $1100/month for a one-bedroom and $1300 for two bedrooms.
Tax Considerations for Owning an Investment Property
Another attractive feature about buying an investment property in Texas is that there isn’t a state income tax. So, your earnings from rent collected will be taxed at the federal level, but not at a state level. The lack of a state income tax also means your potential tenants have more money in their pocket to put towards rent.
If you’re going to buy rental property, it’s a good idea to work with an accountant. A tax professional can help you properly report your rental property income and expenses. They can also make sure you utilize all deductions you’re eligible for, including depreciation. Consult a tax advisor with any questions you have about the tax implications of owning rental property.
Legal Considerations for Owning an Investment Property
Just as we recommend working with a tax professional when you buy an investment property, it’s also a good idea to consult an attorney. You want to make sure you’re operating within local, state, and federal laws in regards to screening tenants, writing a rental agreement, holding security deposits, and filing for eviction if necessary.
Determine Your Rental Property Investing Budget
Before you can find the right type of rental property, you need to determine your budget for investment property financing in Texas. What is your price range for purchasing an investment property? What are your financing options?
The best way to answer these questions is to get pre-approved for an investment property mortgage loan. This will help you figure out your price range as well as your options for financing. When creating an overall budget, you should also account for rental property expenses like maintenance, repairs, tenant vacancies, and other costs. You’ll want to have a decent cash cushion going into your rental property purchase to cover the expenses of initial maintenance of the property such as repairs, cleaning, appliances as needed, property taxes, and more. You will also need home insurance for the property. Check the rules and regulations for your city to see if licenses or other additional paperwork is required.
Benefits of Investing in Real Estate in Texas
Investing in real estate through one or more rental properties can be a satisfying way to generate income and build wealth over time. The benefits include:
- Passive Income and Additional Cash Flow: Rental properties are a great way to generate income to supplement or perhaps one day replace your other income streams.
- Portfolio Diversification: Investing in real estate can be an option for diversifying your investment portfolio and asset types. To reduce risk with investment properties, consider purchasing more than one unit and different property types as well.
- Help Build Generational Wealth: With real estate investments, you can potentially create a stable income for yourself and the generations after you by passing down ownership and landlord responsibilities.
- Earn “sweat equity:” If you have the time and skills to fix up and maintain your rental property yourself, you can save money on contractors and more quickly build equity in your property.
Learn More About Mortgage Loans for Rental Properties!
Moody National Bank is a longtime community bank serving Texans since 1907. To learn about your investment property financing options, reach out to a Moody Bank lending officer. Contact us to learn more or visit one of our locations in Houston, Austin, Friendswood, Galveston, Lake Jackson, New Braunfels, Pasadena, Seabrook, Pearland, League City, Texas City, Sugar Land, or Dickinson, TX.