Real estate is one of the most profitable property investments there is. It can provide a consistent source of income and averagely good returns. This is one of the most lucrative types of property investments, one that you as an investor will never regret. You have to research keenly as there are some factors you will be needed to consider before venturing in this type of investment. Evaluate and calculate your expected returns such as the expenses, income and the risks. Be sure to involve a rental property professional to help you get through the process of owning a rental property. Under wrong conditions, a rental can cost you way more money than it can make for you in return. Owning a rental property is not as easy as it may sound; it requires a lot of effort and dedication.
Advantages And Disadvantages of Investing in Real Estate
Advantages
- Tax deductions: your monthly income will help you cater for your debts such as mortgage, insurance, repairs and maintenance and land rates
- Monthly income: in areas where the demand for rentals is high, you can be assured of a steady flow of income. Whether you invest in commercial, industrial or residential buildings, you will always be assured of monthly income as long as there is a high demand.
- Property appreciation: rentals provide equity and it appreciates over time. You may choose to sell it in future to generate a profit and use it to invest in more property.
- Retirement investment: rentals are a great way to save for retirement since it is an asset. With the monthly income you can be assured that you will be able to finance your retirement lifestyle. This is a good alternative other than saving in banks.
Disadvantages
- Illiquidity: rentals are a long-term investment for generating wealth thus cannot help when in urgent need of money. To avoid such, consider investing in neighborhood with high demand for houses so it can help you pay for your expenses.
- Maintenance: if you poorly maintain your rentals then they will depreciate. This will make you lack tenants and thus no consistent cash flow. It is advisable to set aside some money for regular and proper maintenance of your property.
- Disobliging tenants: a disobliging tenant can cost you much more than a vacant house. Some of the common tenant problems include delayed payments, trashing and ignorance of the agreement
What To Consider Before Buying a Rental Property
- Location
This is one of the key determinants when investing in rental property. As you are looking towards investing in rental property, the location of the rentals should be your first consideration. Wrong location will lead to the downfall of your rentals whereas proper location will make your business to flourish with high returns. You may consider a few things while setting up your rentals such as presence of social amenities which include schools, churches and hospitals.
You should also consider whether the location you have chosen is safe enough to attract tenants. Availability of transport and commercial centers can also guarantee you of high returns in this investment. Choose an aesthetic location for your tenants. Try to invest in making your houses exceptional by renovating them to high quality homes. However, in presence of social amenities such as universities, low quality houses may still work for you.
2. Potential income
It is essential to consider how much income you expect from the rentals. This is because if a property does not bring in the income you expected, it will only act as a liability and may deter you from investing in another property in the future. However, the 1% rule comes in handy. The rule states that your total rent should be equal to 1% of your property’s value or maybe greater than. Despite the 1% rule, it is important to ensure that the rent covers the mortgage fees to avoid future disappointments.
3. Plan for emergencies
You need to be prepared in case an emergency arises. Set aside a certain sum of money for such cases. For instance, if your rentals are mostly occupied by students, there’s a high probability that during holidays the houses will be vacant and that leaves you stranded with an unpaid mortgage fee. You are also responsible for repairs and in some cases, you will have to ask your tenants to leave. This will cost you a lot of money and no income from the houses. We recommend you save 20- 30% of your rental income.
4. Target tenants
Your target tenants are also another consideration in your investment. Why is this a consideration? You cannot set up an expensive house in a primarily average neighborhood. For example, students prefer fully furnished houses as they will be there for a short period of time whereas a family will have specifications on the type of house they want. Quality matters to them unlike to students because their stay is long term. The amount of money and the quality of your houses will determine the type of tenant you want. A nice house will attract families whereas a smaller apartment is best suited by students. You may want to run a background check and verify your potential tenant’s income. You may also decide to ask for a copy of their identification card.
5. Holiday homes
This is likely to work in warmer areas such as coastal regions where there are lots of visitors. In case you buy a property in such places, consider investing in holiday homes to open doors for new tenants you didn’t expect. However, holiday homes are a liability to the owner because travelling is seasonal. Despite it being a seasonal activity, the owner is likely to charge a large sum of money on a monthly basis. The tenants will however understand this as it is a short-term visit.
6. Property management
As a property owner, you may not have the time to answer the endless calls from your tenants, therefore you may consider hiring a property manager. This will be a separate budget, but you will be assured that your houses are in good hand and are properly managed. The company takes out a certain amount of money from the rent to cover the costs. There is no specific amount set in this case. This is because there may be extra costs like supervising the maintenance workers.
7. Rental agreement
For your own peace of mind, consider having an agreement as you take in tenants. This is a legal document that indicates the terms and conditions of renting. This document consists of terms such as: the monthly rent, who and when to call in case of emergencies, notices in case a tenant wants to move out among others. At the end of the day, you are the one to decide who you want to rent your house to.
Conclusion
Having the knowledge in what to consider before investing in rental property can be a pain on the neck, however we have made it easier for you. You can be sure that you are making the right decision after reading the tips provided in this article. This is an amazing investment if you take it seriously and consider it a business. You will have to have a better understanding of rental property before deciding to venture into it. The desire to have a passive income should not make you get into this investment without thoroughly researching on it. This type of investment requires a lot of hard work to ensure a proper flow of the income. Just like any other investment, we recommend involving a professional who will take you through this investment. He has had loads of clients with both good and bad reviews with rental property. We hope this article was helpful on your way to investing in rental property.
FAQs
- Can I purchase a rental property with a mortgage?
It is very possible to own rental property with a mortgage. You do have to necessarily pay for it with cash. You can look for 20% deposit and then apply for a mortgage. The monthly rental income is the one you will be using to service the mortgage.
2. What are the types of rental properties?
There are several types of rental property. They include: commercial spaces, apartments, duplexes, holiday homes and multifamily buildings.
3. Is investing in rental property a good idea?
This is definitely a great idea. With the right skills and knowledge and maybe someone to take you through the major processes, you are guaranteed of a successful business. All you need is to research wisely and follow the tips above so as to make sound and right decisions.
4. Which is the best type of rental property?
The best and most profitable type of rental property is the one with a large number of tenants. Many tenants will guarantee maximum returns on your investment. However, the houses must be fully occupied for you to have good returns. Such properties include commercial spaces and apartments.
5. Which is the best type of rental to invest in as a beginner?
A condo may be a great idea as a beginner. This is because they are low maintenance and their association helps you cover external repairs, leaving you with the interior only.