Investing in a property can bring you great returns. The rental income allows you to borrow and get the benefit of leverage by helping you pay the interest on your mortgage. Over the years the rental income received from property investments has increased and this increase has outpaced inflation.
“Real estate investment is the purchase of a future income stream from property and can offer several advantages over other types of investments, including potentially higher returns, stability, inflation hedging, and diversification.” (Investopedia.com)
Investopedia recently listed some of the key reasons to consider investing in real estate:
- Competitive risk-adjusted returns
- High tangible asset value
- Attractive and stable income return
- Portfolio diversification
- Inflation hedging
- The drawback: lack of liquidity
“Real estate is a distinct asset class that is simple to understand and can enhance the risk and return profile of an investor’s portfolio. On its own, real estate offers competitive risk-adjusted returns, with less principal-agent conflict and attractive income streams. It can also enhance a portfolio by lowering volatility through diversification. Though illiquidity can be a concern for some investors, there are ways to gain exposure to real estate yet reduce illiquidity and even bring it on-par with that of traditional asset classes.” (Investopedia.com)
But how appropriate would this type of investment would be for you and your situation?
“Rental properties can generate income, but the return on investment doesn’t typically happen right away. Rental property investments are also risky because of how many variables can affect its performance, like the housing market or your ability to keep it rented. As with any investment, rental properties should be viewed as a long-term investment, not an instant cash cow.” (Kiplinger.com)
Kiplinger.com pointed out expenses you should consider when investing in property:
- Financing: the amount you pay per month in principal and interest
- Homeowner’s association dues: fees you pay for community amenities
- Property insurance: the insurance you carry on your property
- Property taxes: what you pay in state and local taxes
- Vacancy: the amount of cash you need to cover expenses when you don’t have a tenant
- Your time: anytime you put into managing the property reduces the return on investment
To cover the expenses and getting profit – you’ll get your revenue (Kiplinger.com):
- Rental Income: How much you can charge for rent each month
- Mortgage paid down: How much of the property you own
- Change in property value: How much additional equity you have beyond the amount of the mortgage you have already paid down, based on current housing and rental market prices
There are things to consider when investing in a rental property. Fitsmallbusinesses.com listed 30 tips to keep in your mind when buying your first rental property:
- Use leverage to buy the property
- Line up your financing early
- Invest in single-family homes first
- Invest enough to be cash flow positive
- Invest in turnkey real estate
- Focus on your return on investment
- Know your marketing strategy
- Buy what you know
- Have a written lease in place
- Screen prospective tenants thoroughly
- Talk to the neighbors
- Work with a property management company
- Purchase a property with outdoor space
- Buy a multifamily property you can live in
- Accept rent payments online
- Invest in a vacation rental property
- Buy a property near apartment buildings
- Balance your risk
- Look for properties nationwide
- Know the rent control regulations
- Get advice from other landlords
- Have property inspections performed
- Buy a rent-ready property
- Choose a location near amenities
- Choose a property that is ideal for your target renter
- Do a pro forma analysis
- Pay attention to Economic cycles
- Be aware of short-term rental restrictions
- Factor in absorption rate
- Know your inherited tenants
Can you get to the investment market if you don’t have enough money for a down payment or if you don’t want to lock cash into a property purchase? Yes, you can. Biggerpockets.com published 10 ways to buy an investment property with no money down:
- Roll the down payment into the purchase price
- Negotiate a separate installment plan for the down payment
- Trade something other than cash
- Trade houses with the seller
- Get the seller to transfer their mortgage to you
- Apply for a loan assistance program
- Find an investment partner
- Find a property to rent-to-own or lease with an option to buy
- Get owner financing or a land contract
- Use a home equity line of credit form another property
Even if there are many things to consider, the actual process can be easy. If there are things that you would like to know or you would want to get advice from specialists – you can get free help from loan brokers.
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