Are Rental Properties a Good Investment?
Jan 10, 2023
Rental properties have been, for a long time, a passive way of generating income. Real estate investment has produced some of the wealthiest individuals worldwide and continues to do so. But, before you join the people who’re already earning big in the real estate market, you need to understand the basics that come with owning a rental property.
Like any other business, real estate is complicated and requires proper planning. You need to understand how to find a rental property, buy a rental property and find the right tenants. But before you go through all the trouble, is it worth it? Are rental properties a good investment?
Benefits of Investing in Rental Property
There are several great reasons to invest in rental properties versus equities, stocks or bonds.
You’ll be pumping money into your bank account without waking up each morning to go into work. To make the income truly passive, many investors opt to hire a property management company. However, there's typically not a lot of work if you only own one or two properties, or own low-maintenance properties. Passive real estate investing is truly one of the best forms for building long-term wealth.
Attractive Cash Flow
Investing in rental properties provides a flow of cash into your account every month. Rental properties generate recurring income meaning that can be relied on for years to come. It can be an excellent way to ensure financial security before you retire, or just have extra money in the bank. This is especially true if you plan to buy an apartment building as a rental investment. The more tenants, the bigger the cash flow.
If you own a rental property, you have a strong chance to enjoy tax benefits depending on your state. Other than property taxes (which are deductible), real estate investors pay little to no income taxes when owning a rental property. Income tax on rent revenue can generally be reduced significantly after applying tax deductions such as mortgage interest, insurance, renovations and property maintenance.
Property Value Appreciation
The value of real estate properties appreciates with time. This means as the price of the property goes up over time, you will earn more and will be able to pay your mortgage quickly. You also have the option to sell your property at a reasonable amount when the time is right.
While it still experiences its ups and downs, real estate investment has always shown an upward trajectory over the long term. Plus, one of the greatest secrets in real estate investing is avoiding capital gains if you ever decide to sell the property. This is primarily achieved by leveraging a 1031 property exchange.
You’re In Charge
Investing in a rental property puts you in charge of pretty much everything. You’ll choose the kind of property you want, the tenants you work with, and how you manage your investment. You can come up with rental offices depending on the location, residential houses, or short-term vacation stays.
Investing in rental properties is not like investing in stock where someone else will manage your property. Your rental properties are your responsibility. You are the only one who can decide who manages them.
What You Should Know Before Investing in Rental Properties
While owning rentals come with significant financial freedom and other benefits, you can’t go in with your eyes closed. Here are a few basics to know on how to buy a rental property.
Can You Manage a Property?
Before you buy your first rental property, ask yourself whether you can properly manage such business. Being a landlord is not easy considering that you’ll likely have to deal with some stubborn tenants. Rental property management can be cumbersome and time-consuming, especially if you have another job. Luckily, you don’t have to worry because you can always hire a property manager to do the work. Make sure to check the rates, as most property managers charge investors 8-12% of the monthly rent.
Know Your Location
How much you’re going to earn from your rental property depends on where it is located. There are places where rentals are cheap and places where tenants pay more. You don’t want to invest in an area that’s declining in value. A good rule of thumb is to pick an up-and -coming locale that’s experiencing population growth.
When looking at locations, be sure you look out for market trends. A simple Google search such as "rent price trends in Fort Worth, Texas" will allow you to see what rental prices tend to look like in the area. Compare different locations to see where the prices are the most profitable.
You can also research the best neighborhoods to live in and invest there. It’s also a good idea to look for places with low property taxes, plenty of amenities, and several decent schools. Also, ensure your property is located in areas close to public transportation access, a good job market, and neighborhoods with low crime rates.
Many first-time rental property investors make the common mistake of buying a fixer-upper. As a first-time property investor, try and stay away from properties that need a lot of extra TLC. You might get a good deal, but you’ll end up spending a lot of money on the repairs.
If you’re knowledgeable about property repairs or don’t mind spending the extra time and money, go ahead and purchase the fixer upper. Keep in mind that purchasing a property in good condition is a much better decision than one that still needs fixing. Make the process easier for yourself and go for the property that needs the least amount of repairs possible.
Get Your Financing
If you’re not buying your rental property on a cash offer, you’ll need to factor in your financing needs. You can get your investment financing from a bank or a local lender. Check with your potential lenders to understand what you qualify for and the programs they have.
If you plan to finance your rental property, you’ll have to go through stringent approval requirements. That percentage you put down for your traditional residential home will not work for your rental property. You can buy a primary residence with a 3% down payment but you’ll need at least a 20% down payment for most rental properties. Luckily, in lieu of traditional financing, there are also several creative ways to buy rental properties with little or no money down.
Rental property is a worthwhile investment if you understand the basics. If you’re new to real estate investing, make sure you work with an experienced real estate agent and a good property management company to help make sure things run smoothly.
So, are you ready to buy your first rental property? If you're buying in Florida, Georgia or Texas, let SimpleShowing help you out! Our team of experienced agents will help you save on your investment through our buyer refund incentive, as well as ensure you choose the right property for investing success. Contact us today to get started.