Why Invest In Rental Property?
Deciding if buying a rental property is a good idea can be an extremely difficult decision.
On one hand, you are probably attracted to the passive income that comes from owning a rental property.
On the other hand, however, you may shy away for various reasons, such as the time and effort that is required to manage a rental property.
Luckily for you, we are here to help.
In this guide, we will be going over all of the reasons that you should (or shouldn't) purchase an investment rental property to help you make your decision.
To begin, let's first discuss some of the benefits of buying a rental property.
Benefits Of Buying A Rental Property
Potential real estate investors are attracted to various benefits promised by rental investing.
Below, we have outlined some of the main benefits of buying rental property.
One of the main benefits of owning a rental property is the potential for passive income. This means that you can earn rental income from the property without actively managing it on a daily basis.
The amount of passive income you can generate from a rental property will depend on a variety of factors, including the location of the property, the demand for rental properties in the area, and the amount of rent you can charge.
For example, if you charge $1,500 per month in rent and the property is occupied for 12 months out of the year, your annual rental income would be $18,000. Then, after taking out expenses and taxes, any leftover cash flow is profit from the rental property.
Potential for Appreciation
Another potential benefit of investing in a rental property is the potential for appreciation in the property value over time.
Historical data shows that real estate values tend to increase over time, although there can be short-term fluctuations in the market. By holding onto a rental property for a longer period of time, you may be able to sell it for a higher price in the future.
Possible Tax Benefits
Owning a rental property can also offer potential tax benefits. For example, you may be able to deduct certain expenses related to the property, such as mortgage interest, property taxes, and certain repairs and maintenance costs.
These deductions can lower your taxable income and potentially reduce the amount of tax you owe. Additionally, you may be able to depreciate the value of the property, which can also lower your taxable income.
Investing in a rental property can also serve as an inflation hedge, as the value of the property is likely to increase over time along with inflation.
This means that the value of the property may increase at a rate that outpaces the rate of inflation, potentially providing you with a higher return on your investment.
Rental property owners have complete control over the property and can make decisions about how it is used and managed. This includes deciding on the rent amount, choosing tenants, and making any necessary repairs or renovations.
Potential to Leverage the Property
Owning a rental property can also provide you with the opportunity to leverage your equity in the property to purchase additional properties in the future.
By using the equity in your rental property as a down payment on a new property, you may be able to invest in more real estate without having to come up with a large amount of cash upfront.
For example, if you have a rental property worth $200,000 with $100,000 in equity, you could potentially use that equity as a down payment to purchase a new rental property without having to come up with an additional $100,000 in cash.
Drawbacks Of Purchasing A Rental Property
While there are benefits to investing in a rental property, it's also important to consider the potential drawbacks before ultimately making your decision.
Some potential drawbacks include:
One potential drawback of rental property investing is the upfront costs.
These may include the down payment, closing costs, and any necessary renovations or updates to the property. These costs can add up quickly and may be a significant financial burden, especially if you are just starting out as a landlord.
According to the National Association of Realtors, the median down payment for first-time home buyers in 2021 was 6% of the purchase price, which equates to $16,740 for a median-priced home of $279,200. In addition to the down payment, you may also have to pay closing costs, which can range from 2-5% of the purchase price.
In addition to the upfront costs, there are also ongoing expenses to consider when investing in a rental property. These may include property taxes, insurance, and maintenance costs.
According to the National Association of Realtors, the median monthly housing costs for homeowners in the United States was $1,447 in 2021, which includes the rental property mortgage payments, property taxes, and insurance. It's important to budget for these expenses and make sure you have a plan in place to cover them.
Risk of Vacancy
Another potential drawback of investing in a rental property is the risk of vacancy. This means that there may be times when you don't have a tenant in the property, and you won't be earning any income from it.
To minimize this risk, it's important to continuously market the property to attract potential tenants and to set a competitive rental rate. According to the Census Bureau, the national vacancy rate for rental housing in the United States was 6.4% in 2021.
Difficult or Problematic Tenants
While most tenants are responsible and pay their rent on time, there is always the potential for difficult or problematic tenants.
These tenants may cause damage to the property, pay their rent late, or create problems with other tenants. Dealing with difficult tenants can be time-consuming and frustrating, and it's important to have a plan in place to handle these situations.
Lack of Liquidity
Another potential drawback of investing in a rental property is the lack of liquidity. This means that it can be difficult to access the money you have invested in the property quickly.
If you need to sell the property in a hurry, it may be difficult to find other rental property buyers, and you may have to sell at a lower price than you would like. This can be a problem if you need to access the money for an emergency or other unexpected expenses.
High Level of Maintenance
Owning a rental property also requires a high level of maintenance to keep it in good condition. This may include tasks such as fixing leaks, painting, and replacing appliances.
These maintenance tasks can be time-consuming and costly, and it's important to budget for them and have a plan in place to handle any issues that may arise.
Time and Effort Required to Manage the Property
If you are going to manage the rental property yourself, you are going to have to take on a large collection of responsibilities. This may include tasks such as finding and screening tenants, collecting rent, handling maintenance issues, and responding to tenant requests.
These responsibilities can be time-consuming and may require a significant investment of your time and energy. It's important to carefully consider whether you have the time and energy to devote to managing a rental property before making the decision to invest.
Factors to Consider Before Purchasing an Investment Property
Deciding whether to invest in a rental property is a big decision and requires careful consideration. There are several factors that you should consider when determining if investing in a rental property is right for you.
One of the most important factors to consider when deciding whether to invest in a rental property is your financial situation.
This includes factors such as your savings, income, and debt. It's crucial to have a good understanding of your financial situation before committing to a rental property investment as it will help you determine if you have the financial resources to handle the upfront and ongoing costs of owning a rental property.
Another factor to consider when deciding whether to invest in a rental property is your risk tolerance. Owning a rental property is a risky investment and there are no guarantees that you will earn a return on your investment.
You should always carefully consider your risk tolerance and whether you are comfortable with the potential risks involved in owning a rental property.
Ability To Handle Responsibilities
Owning a rental property also requires a high level of responsibility, including tasks such as finding and screening tenants, collecting rent, and handling maintenance issues.
If you're planning on managing the property yourself, you have to consider whether or not you have the time and energy to devote to these responsibilities before making the decision to invest in a rental property.
Local Real Estate Market
Another factor to consider when deciding whether to invest in a rental property is the local real estate market.
This includes factors such as the supply and demand for rental properties in the area, the median rent prices, and the overall condition of the housing market. It's important to research the local real estate market to get a good understanding of these factors and how they may impact your rental property investment.
Condition Of The Property
It's also important to carefully consider the condition of the property and any necessary renovations before investing in a rental property.
If the property is in need of significant repairs or renovations, it's important to budget for these expenses and consider whether they are feasible. It's also important to factor in the cost of ongoing maintenance and repairs when deciding whether to invest in a rental property.
Although we have covered a lot of information above, you may still be left with some questions that may impact your decision on whether you should invest in a rental property or not.
To help, here are some of the most frequently asked questions about rental properties.
What are the different types of rental properties I can invest in?
Some of the different kinds of rental properties which you can invest in include:
- Single-family homes: These are standalone houses that are rented out to a single tenant or family. Single-family homes are a popular type of rental property because they offer a high level of privacy and space for tenants.
- Multi-family homes: These are properties that contain multiple units, such as duplexes, triplexes, or apartment buildings. Multi-family homes are a good option for real estate investors who want to maximize the number of rental units they own.
- Commercial properties: These are properties that are used for business purposes, such as office buildings, retail spaces, or warehouses. Commercial properties can be a good option for investors who want to diversify their rental portfolio and potentially earn higher rental rates.
- Vacation rentals: These are properties that are rented out to tourists or travelers for short periods of time, usually a few days or weeks. Vacation rentals can be a good option for investors who own properties in popular vacation destinations.
- Student housing: These are properties that are rented out to students, typically near a college or university. Student housing can be a good option for investors who want to capitalize on the high demand for rental units near educational institutions.
- Senior housing: These are properties that are specifically designed for older adults and are often equipped with features such as mobility aids and emergency call systems. Senior housing can be a good option for investors who want to focus on a specific niche market.
- Co-living spaces: These are properties that offer shared living arrangements, with tenants typically renting a private bedroom and sharing common areas such as kitchens and living rooms. Co-living spaces are a popular option for young professionals and students who want to save money on rent.
How much time is needed to invest in rental properties?
Investing in rental properties can require a significant time commitment, depending on the level of involvement you choose.
Some investors choose to be very hands-on and handle tasks such as finding and screening tenants, collecting rent, and handling maintenance issues themselves. Other investors prefer a hands-off approach and hire a property manager to handle these tasks for them.
If you are not able to invest much time at all, and want something that carries less risk, other forms of real estate investing, like real estate investment trusts, will probably be the best idea for you.
How much does a rental property cost?
According to the National Association of Realtors, the median monthly rent for a single-family home in the United States was $1,500 in 2021.
However, this is just a national average, and the actual cost of rental properties can vary significantly depending on these factors:
- Location: Rental properties in popular or in-demand areas tend to be more expensive than those in less desirable locations. For example, rental properties in major cities or desirable suburbs may be more expensive than those in rural areas.
- Size: Larger rental properties, such as multi-family homes or commercial buildings, may be more expensive to rent than smaller properties like single-family homes or apartments.
- Condition: Rental properties that are in good condition and have been well-maintained are generally more expensive to rent than those that are in need of repairs or renovations.
- Amenities: Rental properties that offer additional amenities, such as pools, fitness centers, or on-site laundry facilities, may be more expensive to rent than those without these features.
- Demand: Rental properties in areas with high demand from renters may be more expensive to rent than those in areas with lower demand.
We understand that there are various pros and cons to buying an investment property which makes it such a difficult decision. However, after reading through this guide, we hope that you have a much better idea of whether or not it is something that would benefit you.
If you decide that you are ready to jump into the world of real estate, we welcome you.
Read on to discover everything you could possibly need to get started, and so much more.