Property rentals are not just the most popular real estate investment, it is also the easiest to implement and manage. Property rental is very simple and does not require a sophisticated level of degree, knowledge, and skills to become a successful landlord. The risk is also very low as long as landlords did their job screening their tenants.
Despite the fact that rental property is a profitable investment, there are still those that question its profitability. As a matter of fact, SF Gate asked this question for the readers to answer. Is rental property a good investment? Check out the answer below.
Rental property remains one of the best classes of investment available. Good properties offer a unique combination of capital growth, ongoing cash flow and significant tax benefits. However, if you buy rental properties the wrong way, they quickly can become financial albatrosses around your neck. As such, the key to success in rental-property investing is to buy properties the right way.
Appreciation
People often buy rental property for the appreciation. If you buy a $400,000 property and it goes up in value to $500,000, you have made $100,000, or a 25 percent return. Using leverage, which is a fancy way of saying “borrowing money,” makes your returns even better. Imagine if you put $80,000 down and borrowed $320,000 to buy that $400,000 property. Then, if you sold it for $500,000 and used the proceeds to pay off your loan, you would get $180,000 plus whatever you paid down on your loan — at least a 125 percent return.
Cash Flow
While certain investors will buy properties for their appreciation potential alone, other rental properties will provide cash flow. If you have money left over from your rent after paying off your operating expenses, you have a “net operating income (NOI).” If you have money left over from your NOI after paying off your mortgage, you have net cash flow.
Tax Shelter
Real estate also enjoys a number of different tax advantages. While you own your real estate, it builds equity without you having to pay tax on it. At the same time, you can write off a number of expenses, including depreciation, which shield a large portion of your income from taxes. Finally, when you sell appreciated rental real estate, you can structure the transaction as a 1031 Exchange
Rental property is bound to price appreciation. Property value goes up over time, plus you may also increase the rent of your tenants over time. In addition, a very good rental property also provides a good combination of capital growth, tax benefit and cash flows from rental fees.
Trent Hamm of The Simple Dollar wrote an article about the pros and cons of owning a rental property in order for current and future landlords to fully understand property rentals as a form of real estate investment. Check out his article to learn more.
The Advantages and Disadvantages of Owning a Rental Property
Image Source: The Simple Dollar
When I was a little kid, a cousin of mine owned several rental properties in the small town near my home. This was basically his livelihood, as he spent his time taking care of the properties as needed, collecting rent, and so on. He spent about 20 hours a week on his collection of properties that was spread around the town.
I always thought that this guy kind of had things figured out. He only had to work about 20 hours a week, after all. He was constantly receiving income from the properties, plus he owned all of those houses that he could sell if he wanted to.
But the reality was different. When I visited his house, it often seemed like it was held together by duct tape. It was easily in worse shape than some of the houses he rented out. In 1993, a flood wiped out most of the houses and trailers that he rented and it turned out that the insurance money he collected wasn’t enough to rebuild.
Instead, he wound up dying with very little money left and a decided hand-to-mouth existence during the final years of his life. In fact, looking back on it, it was fairly obvious that he never had a whole lot of money, even when his rental “empire” was in great shape.
The Advantages
The advantages to owning a rental property are relatively few, but they’re powerful. To put it simply, if everything lines up well, you can make a lot of money from a rental property.
Income from Renters
The biggest benefit of owning a rental property is that the renters will provide you with a direct income stream. Those monthly rent checks go straight into your business account, ideally more than offsetting any expenses for the month.
For example, if you own a house that you rent out for $1,000 per month, that house when fully occupied will put $12,000 per year back into your accounts.
It’s hard to argue with a direct income stream like that. It is worth nothing, though, that those kinds of figures are optimistic ones and you shouldn’t just dive in expecting those results. Still, even partial results can be very good. If you can keep the property rented for just 75% of the year, that’s still $9,000 a year in income, after all.
The Disadvantages
On the other hand, there are a number of disadvantages to owning a rental property. Individually, these disadvantages are relatively small, but they add up to a significant cost.
Concentration of Assets
One drawback to investing in a rental property is that for most people, owning a rental property is a serious concentration of their assets. It would take a significant portion of the average American’s net worth to fully own a rental property.
The problem with that concentration is that it’s not diversified at all. That investment is in a specific house on a specific block in a specific neighborhood in a specific city. If that neighborhood goes downhill, you lose a lot of money. If that block goes downhill, you lose a lot of money. If something unfortunate happens to that house that insurance can’t handle, you lose a lot of money. Click here to read the rest of this post…
As a landlord, it is important to know the pros and cons of property rentals first before buying a property and start becoming a landlord. If the pros clearly outweigh the cons, then it’s a go signal for you to start rental investment. A direct income stream provided by the rent payment of the tenants. However, one of the major disadvantages of property rental is that most of the time property for rentals are very expensive, and this income concentration is not diversified at all.
Brandon Turner of BiggerPockets enumerated the reasons why rental properties are the best investment. Learn from the expert himself. Check the article below.
12 Reasons Why Rental Properties Are the Best Investment
Image Source: BiggerPockets
Sure, flipping and wholesaling properties might be fun. Notes and tax liens might have fewer tenants. The stock market might be more popular.
But rental properties are my true business love.
1. You can purchase rentals using leverage.
Rental properties are great because you can borrow the bank’s or someone else’s money to increase the potential return.
This is known as leverage.
In other words, you don’t need to have 100 percent of a property’s purchase price on hand to be able to buy it. Rental properties allow me to buy large properties for far less cash than I might need to purchase stocks or other investments.
2. Rentals allow you to hustle for greater returns.
Not only can I leverage my cash, but I can also leverage my time and abilities to make magic happen in this game—something difficult to do with other investments.
In other words, I can hustle.
If I want to do the work needed to rehab a property, I can do that. If I want to leverage my networking skills to raise money, I can do that instead. If I want to leverage my knowledge and time to find better deals that provide an even greater return, I can do that.
Rental property investing gives me the ability to hustle for my future.
3. You can manage the investment directly.
I’ll fully admit I’m a bit of a control freak, and that drives me toward rental properties in a powerful way. With a rental property, I am directly responsible for the outcome of my investment.
It is up to me to analyze a property before I buy it. It’s up to me to ensure the property is in good condition to rent; it’s up to me to ensure the property is running at peak performance.
I don’t have to depend on some board of directors in New York City for my life’s direction. I can manage my investments directly and personally.
4. People always need a place to live.
The real estate market will go up and down, but the beauty of rental properties is that demand will never end. People always need a place to live, so unlike the latest tech trend or in your brother’s start-up, real estate is an investment that will last.
Furthermore, because increasing student loans are making qualifying for a mortgage more difficult and our culture increasingly values mobility, the demand for rental properties will only grow over time. Learn more here…
Among the reasons why property rentals are the best investment is that you as the landlord can manage it directly, making you responsible for the outcome of your investment. Also, people always need a place to live, and a lot of them can’t afford to purchase a new home, hence the demand for your investment will never end. It can also be used as your leverage in case you need bank collateral. These and other significant reasons make property rentals the best investment.
If you’re planning to sell your house and start your property rental business, we at Dependable Homebuyers can help you find buyers for your property, raising the capital you need for your home rental business. To learn more about our services, visit our website at https://www.dependablehomebuyers.com and we look forward to hearing from you.
