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Health & Fitness

What Type of House Is the Best Investment?

Not all investments houses in Montgomery County are created equally and some types are more profitable than others.

Appreciation, tax breaks, and potential rental income are advantages of owning real estate. Whether you are a homeowner or a real estate investor, you benefit from owning property.  Not all investments houses in Montgomery County are created equally, however, and some types are more profitable than others.   

Most beginning investors concentrate on cash flow and therefore concentrate on tier one properties known as “starter homes”.  These homes are generally built as a cluster, tend to have smaller lots, are about the same size, and look pretty similar to one another.  In Montgomery County, these houses typically range between 1,000 to 1,200 square feet, have small bedrooms and few amenities.

Starter homes appreciate well and are in high demand since few new ones are being built.  Newer homes, tend to be larger, fancier and more costly.  Smaller houses rent well in this county since they attract millennials and budget conscious renters.   They also attract government professionals that are doing a one-to-three year job rotation in the DC area.

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Tier two properties are a step up from the starter home; they are slightly larger houses and/or houses in somewhat nicer neighborhoods (I say ‘and/or’ in this case because there are a lot of little houses in nice areas that rent for top dollar because of their proximity to local jobs and services).  This tier also makes for a  great investment opportunity since it tends to attract longer term tenants.   Often houses in this tier are located in areas with higher rates of owner-occupied houses which tend to be better maintained than rental properties.  Likewise, these areas often have top rated schools.

Tier three houses are large houses in upper income neighborhoods.  Although they tend to appreciate well, they generally will produce a negative cash flow for a considerable time after purchase.  In other words, even though you may have the property rented, you will need to cough up money for the mortgage and other costs.  Repair and maintenance issues become an issue in these 'trophy' properties since renters willing to pay such high rents are looking for trendy upgrades and upscale amenities not required of less expensive investment properties.  Unless you have deep pockets, this is not a tier I recommend for most residential investors.

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Regardless of which tier you decide to invest, you should remember that the vast majority of home buyers are looking for a three bedroom, two bathroom house.  Renters want the same thing.  If you decide to buy a smaller investment property, you will be at a disadvantage when you go to rent.   Another consideration is whether the house has a basement or some other storage area.  Many renters in Montgomery County want a house with a basement or at least a shed for storage.

In the end, tax and cash flow considerations should guide your decision.

If you are looking to increase your monthly cash flow (the money in your wallet), tier one properties generally provide greater rent to value, and greater cash flow for the investment made, than tier two properties.

If, on the other hand, you have employment income and are looking to reduce your taxable income, tier two houses may be a better option since they often produce larger capital gains and less net rent in relation to their value.   These gains really take on their meaning once you apply the corresponding tax rates.  Currently capital gains tax is set at 15-20% - considerably less than the 25-39.6% income tax rate that most investors pay on rental income.  So, a higher income taxpayer will generally have a higher after-tax profit by investing in a more expensive property since more of the profits come from capital gains than rental income.

For additional articles on Montgomery County residential real estate, go to my blog, HouseInvestor.net.

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