Home values continue to rise, enticing many to go into rental market investment. Rental properties are becoming more profitable but also involve a steep commitment from investors. Before making a purchase, let’s check out some things to consider about the benefits and drawbacks.
Rental properties have financial implications, making it crucial to recognize the related risks and rewards. Below are a just a few reasons why rental properties are a great investment — along with a few things to know.
Rental Property Investment Benefits
- Good source of income. Rentals produce two sources of income: monthly rent and property value growth.
- Tax deductions. Owners can benefit from tax deductions from mortgage interests, property insurance, maintenance costs, and other required expenses.
- Inflation protection. Real estate historically serves as a hedge against inflation. Despite the economic changes, assets like single-family homes continue to appreciate.
- Asset buildup. Buying a residential property and renting it out can end up footing 10 to 15 percent of the mortgage.
- Income predictability. You get predictable expenses and returns with rental properties. Since you determine the rental rate, you can accurately budget.
Rental Property Investment Drawbacks
- Difficult tenants. Difficult tenants can fall behind on rent or even destroy the property.
- Neighborhood decline. External factors like local politics or failed redevelopment projects can decline property value in a neighborhood.
- Regular upkeep. Regular maintenance may be a problem if you’re preoccupied with a full-time job or may not have funds to utilize.
- Active involvement. Owning a property takes commitment to address tenants regularly, repair the property when necessary, and file required documents.
- Vacancies. High vacancy rates tend to hamper rental income, and many properties can be vacant for at least a portion of the year.
Determining Your Involvement
Property investment can feel like having another job based on your commitment level. Before investing in a property, evaluate your investment style and if you can be a hands-on landlord or leave the work to others.
Rental Property Considerations
Not all properties will suit investors. Besides looking for a property that fits your budget, understand that a real estate investment is something you’ll mostly manage on your own. Spend some time learning about the types of properties that will assist you in determining how to proceed.
Making a financial plan can also help you ensure that you make a solid real estate investment. Factors such as down payment, financing, and other expenses like insurance and repairs must be added to your consideration bucket.
There are different costs linked with rental properties, including homeowners’ and landlord insurance for property damage or loss of income. You need to consider repairs, marketing expenses, appraisal fees, and homeowner’s association dues, among other things.
The alternative – Real Estate Investment Trust (REIT)
A real estate investment trust (REIT) is a company that owns and manages a portfolio of diverse real estate properties with a simple business model – generate rental income and drive asset appreciation in the longer term. Since REITs are directed to distribute at least 90% of their taxable income back to shareholders as dividends, it is often viewed as a stable stream of passive income.
Visit a top bank’s website to learn about the types of real estate investment trusts and how they will value-add to your portfolio as an income-generating tool.