Risks and Rewards of Investing in Jacksonville Real Estate
Jacksonville real estate investments are likely to be profitable, whether you’re buying a single-family home that you plan to rent out to long-term tenants or you’re diversifying your portfolio with different times of rental homes. This is a growing market with a surging population. Rental rates are rising and so are home values.
There are plenty of rewards to investing in Jacksonville real estate.
Buying and holding rental properties in this market offers a low-risk, high-return investment opportunity, especially over the long term. When you invest in real estate, you have an asset that hedges against inflation.
As with all investments, there are also risks. Real estate has a high cost of entry, especially compared to stocks and other investments. You can’t sell it as quickly as you might need to. The market still tends to fluctuate and while we are experiencing a strong market now, we don’t know when that may change.
The market drives a lot of the risks and rewards you’ll encounter as a real estate investor. In Jacksonville, we are in a strong position. There’s a large pool of well-qualified renters and as in other markets, demand is outpacing supply. This drives up prices and gives property owners an opportunity to raise rents, retain tenants, and avoid vacancy. The rental laws in Florida are not as strict as they are in other states.
Jacksonville allows you to leverage the rewards of real estate investing while minimizing the risks.
Let’s take a closer look at what your advantages and challenges might be when you invest in Jacksonville rental properties.
Investing in Jacksonville Real Estate: Rewards
The rewards you seek as an investor will inspire your investment goals. Are you looking for cash flow? Do you prefer appreciation? Are rental properties and their losses and write-offs a great way to reduce your tax liability? Maybe you’re looking for all these benefits while your tenants pay down the mortgage you’ve taken out to pay for your investment.
There are some great rewards investors are likely to reap, especially in the Jacksonville market.
- Rental Income
One of the best reasons to invest in residential real estate is that you have a steady and recurring income stream every month. When your property is occupied, your tenants pay rent. That rental income will contribute to your mortgage, your insurance, property taxes, and other expenses associated with the property. As you build more equity, pay down your mortgage, and increase your rents, you’ll eventually be earning more in rent than you spend every month. That positive cash flow is a huge benefit to investing. It may take some time to get there, depending on how you’ve financed and structured your purchase.
- Real Estate Investments Appreciate in Value
Jacksonville real estate appreciates over time, and the rate of that appreciation will typically outpace annual inflation. We’re in a unique period right now and there are always market corrections that can be uncomfortable, but when you own a well-located rental home and keep it in good condition, you’ll see the value of that asset continue to climb and eventually, you’ll sell it for an impressive profit.
Real estate is tangible. It’s not like a stock, which has a value that can potentially plummet to zero. The investment property you own is a physical asset and it usually comes with land. There will always be value in what you own, and that value will increase as you make improvements and upgrades to meet the demands of the market.
- Tax Benefits to Jacksonville Rental Property
Rental property owners are required to declare the income they earn on the rent they collect when filing taxes, but you’ll also have the benefit of deductions and depreciation. You can deduct property management fees and other professional fees as well as mortgage interest, maintenance expenses, and other costs associated with your property. Make sure you confirm everything with your tax professional or CPA.
The depreciation expense that you can claim reduces your taxable income, which is a huge benefit to investors. The IRS currently has the depreciation period for residential real estate set at 27.5 years.
- Leveraging Your Jacksonville Real Estate Purchase
You have the opportunity to buy real estate investments in a unique way: you can borrow money. Real estate acquisitions will likely need a mortgage unless you’re paying in cash. You might put 20 or 30 percent down, but you’ll finance the rest. The debt might seem intimidating, but actually, this is working in your favor. Your ROI is higher because you didn’t sacrifice all your cash; you took on debt.
Here’s an example. Maybe you made a $50,000 down payment to acquire a $300,000 rental property in Jacksonville. If you earn $25,000 per year from that property, you have generated a return of 50 percent on your $50,000 down payment. This would not have happened without your loan.
- Maintaining Asset Control
Another benefit that isn’t always considered is that you maintain total control over your asset and what is done with it. There aren’t any other stakeholders who will influence when you buy, sell, exchange, etc. When you invest in stocks, you don’t have any control over how they will perform in the market.
With your real estate investments, you have more of a say in how they’re performing. You can make renovations. Raise rents. Replace tenants. Diversify a portfolio. The market will shift and you’ll find a few surprises, but there’s a lot less uncertainty with real estate investments than with other types of investments.
Investing in Jacksonville Real Estate: Risks
We talk to new investors all the time about the benefits of investing in real estate. We believe that when the right property is chosen and professional experts are helping you make good decisions, rental real estate is an excellent way to earn money in the short and long term.
That doesn’t mean there isn’t risk. It’s very easy to make an expensive mistake and you need to be prepared for the amount of money your investment will cost. Here are some of the challenges to expect when you’re investing in Jacksonville:
- You Have to Buy the Real Estate
It takes a minimum deposit to begin investing in stocks or mutual funds. Real estate, however, requires some money in the bank. You’ll need a down payment if you’re planning to finance your purchase plus closing costs. There will likely be repairs and remodeling that are needed before the property is ready for the rental market.
Not only do you have to buy the real estate, but you also need to have the funds required to maintain it. Tenants will report minor repairs and major problems. How will you pay for the leaking kitchen sink, the new water heater, and the air conditioning that goes out in the middle of a hot Florida summer?
- You’re Investing for the Long Term
If you want to make real money, plan to buy and hold your property for as long as possible. There is really no get-rich-quick strategy when it comes to residential real estate investments. There are investors who focus on buying and flipping properties, but with the costs of materials, labor, and services where they are right now, it’s not easy to make money this way.
- Legal and Logistical Challenges or Renting Out Jacksonville Properties
A lot of the risk that comes with real estate investing has to do with the act of renting your property out to tenants. There are a number of federal and state laws that govern your relationship and the condition in which you’re required to keep your property. Fair housing laws require you to treat every applicant and tenant consistently. That seems easy enough, but we’ve seen property owners make fair housing mistakes simply by using the wrong language in their advertising. You’ll need to know the difference between a pet and a service animal. There are security deposit requirements and a legal eviction process that needs to be followed if you decide to remove a tenant.
Tenants come with their own risks. If you don’t screen properly or you run into a problem with your residents, you could find yourself trying to collect late rent, paying for excessive property damage, and managing ongoing tenant conflicts and disputes.
Finally, there’s a risk that things just won’t work out. You might buy the wrong property. You might find that your property suddenly begins to decrease in value. Maybe the maintenance costs will be much higher than you anticipated or the market will shift and you’re left with a vacancy property.
One way to balance these risks against the rewards is to work with a professional Jacksonville property manager. When you have the experience and resources of a management company, you can expect that your risks and liabilities will be minimized while your opportunities are maximized.
We’d love to tell you about how we help investors earn more and spend less on their Jacksonville rental properties. Please contact us at Red Rooster Property Management. We have a lot of experience working with investors in Jacksonville, St. Johns, and Orange Park.