I love rental property! Where else can you leverage your investment for thirty (30) years at a low interest rate and have someone else pay for it? Real estate and rental property are not risk-free; however it is one way to accumulate wealth! It starts with savings and how you invest your money. You can start out small by renting out your first home. What are you waiting for?
Why I Love Rentals?
Why do I love rental property so much? It must be because it is just like the Monopoly game we played as kids! I played Monopoly for hours as a kid with my friends. I loved how I received rent or income just because I owned a property. The rent would increase if I developed the property with homes or hotels. There is nothing wrong with that! I never realized how much those many hours influenced my life until now. One of my very first investments was not in the stock market, but in rental property.
Although Monopoly influenced my investments, I needed to learn more about investing in rental property. See, you have much more at stake than just winning a game! It is more than accumulating Boardwalk and Park Place or the most Monopoly money. It is also much harder because it takes more than a few hours to become rich. Yes, there is real money at stake here and you can lose it all. You can make mistakes such as buying an overpriced property or rent to the wrong tenants.
It Is the Numbers!
Experienced landlords make mistakes too. The factors you thought about when you bought your first home are equally true for prospective renters. Renters and buyers want good locations that are near shopping, good schools and safe neighborhoods. Monthly rent or the price of the property is crucial! Not everyone can rent or buy every house or condominium. You can get more rent or a better price for a good location, but that does not mean it is more profitable!
How do you get started? I really recommend not selling your first home and renting it out instead. It may be a “starter” home or a condominium, but it doesn’t matter! If you do not have a property to rent out, you start with your down payment. How much you can invest will determine what kind of property you can buy. If you buy a home or condominium you will need a 20% down payment. If you cannot breakeven with a 20% down payment, you may need to put down more or keep looking for the right property! Will the property generate a profit?
Location, Location, Location
Location is everything because you can do a lot of things, but you cannot change location! Location determines neighborhood, schools, property taxes, crime, transportation (freeway access/public transportation), employment, vacancies and rent. A house or apartment in good neighborhood will rent faster for a higher rent than in a bad neighborhood. All these factors determine rent and price. One of the most important factors is access to transportation. It will determine price and the amount of rent you can generate for the property. It also determines the kind of tenant you can attract to the property.
Buying rental property is much more about the numbers. Despite that, you still need to make sure the property will show well and has the characteristics of a property that people want to buy or rent. Not every buyer wants to rent their home out! A good property will get a good rent and attract buyers as well. Homes and condominiums attract longer term tenants vs. the average apartment. So do not expect to raise your rent all the time because that scares tenants and vacancies are more expensive. Longer term tenants generally will take care of your place better which means less wear and tear.
Why Invest in Rental Property?
Rental property normally is priced by how much income is generated. There is an exception with single family homes and condominiums. They sell based on the value of the intrinsic property. Buying a starter home will always be attractive. As property values increase, your asset is growing along with it. In the meantime, your mortgage, property taxes, insurance etc is paid by your tenant and you have an asset that is appreciating.
If it was your principal residence for two (2) of the last five (5) years, you can exclude up to $250,000 ($500,000, if a couple) from taxation. This is in addition to deducting mortgage interest, property taxes and other expenses. The remainder is taxed at capital gains tax. You should generate a return on investment of eight (8) to ten (10) percent annually and the property will probably appreciate an average of five (5) percent per year. It is one of the advantages of a leveraged investment.
I approach investing in rental property conservatively. I set up reserves for repairs and maintenance which may reduce your annual return on investment. You want to keep up the repairs and maintenance because it maintains your asset value. Keeping your renters happy means you can raise your rent easier and they are less likely to move. If you have a good tenant, you want to keep him/her. It is your investment and you want to safeguard it.
Rental property is a great investment opportunity, but it is not for everybody. If you start with your first home or condominium and rent it out, it is a easier transition into rental property. You should refinance to get the lowest mortgage rate because banks charge higher rates for non owner occupied real estate. Some people buy homes and move every few years and take advantage of the principal residence tax exemption and others build a portfolio of rental properties. Some people like the idea of selling off a home and use the proceeds to live on. Either way, it is a great way to accumulate wealth. There is a lot to love about rental property!
Photo by: juliocrockett
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here is a lot to love about rental property!