According to a 2016 Gallup poll, Americans’ top pick for “best long-term investment” is real estate, coming in ahead of stocks, mutual funds, gold, savings, CD’s and bonds. While owning your own home has an immense amount of benefits, so does purchasing and maintaining a rental property, though it’s not for everyone. If you’re considering the path of real estate investing, see what you need to consider first.
Benefits of Buying Rental Property
Rental property can be a lucrative investment with several methods of return if planned and executed well. Benefits include:
- Hedging against inflation
- Control of your own investment
- Tax benefits
- Capital growth
Choosing a Good Investment Property
A successful investor remains unbiased when searching for a property, considering all of the variables and staying within the means of their investment range. When shopping for an investment property, consider these items:
- Neigborhood. The quality of a neighborhood can influence your investments’ profitability, vacancy rates and resale value. For example, if you purchase a property in a college town, you may need to account for the higher possibility of vacancy rates in the summer months and more tenant turnover.
- Schools. Even if prospective renters don’t have school-age children, school quality affects your home value.
- Job growth. Employment opportunity typically means a greater need for local housing and rental opportunity.
- Rental competition & vacancy rates. Is the area flooded with new apartment buildings? Do you see current landlords constantly placing ads to fill vacant homes? Assess the supply and demand of the area.
Considering Cash Flow vs. Costs
This is a no-brainer for anyone making an investment. Will the amount you can ask in rent be enough to cover the costs of the property, including the mortgage, taxes, insurance, maintenance, etc.? Do some research and see what similar investment homes sold for and what their asking rent price is.
Apart from covering the mortgage payment and maintenance, you’ll also need to assess some other scenarios:
- Will your renter pay for all or some of the utilities?
- How will you find tenants? Will you need to find a realtor to do showings and advertise or will you do it yourself?
- What if you happen to have a vacancy for a few months? Will you have enough funds to cover lost income?
Managing Your Property
Another nagging question that comes with owning a rental property is who will perform necessary maintenance. Will the renter be responsible for lawn care, snow removal, pest control, etc.? Are you handy enough to perform day-to-day maintenance tasks? Are you willing to be available to field emergency late-night maintenance calls from tenants (not all home issues happen during business hours)?
Financing Your Property
In the majority of scenarios, you will need to have a minimum down payment of 20 percent. If you’re interested in purchasing an investment home or property, download our free Investment Properties Guide to learn more about the benefits real estate investing has to offer, what you need to know about financing and how to make it a successful venture.