When there’s a huge amount of pressure to instantly achieve success and thousands of dollars immediately, investing in rental properties is often overlooked. People see renovation shows and believe that flipping properties is the way to gain that instant success. It’s actually stressful, full of pitfalls and incredibly expensive if mistakes are made.
Investing in rental properties means incredible benefits when done properly and with the help of professionals to manage the rentals. While there are many benefits, there are some cautions to take into consideration too.
Cautions for Investing
Where to Invest?
The region where you invest is important for the success of your rental property venture. It’ll influence the amount you charge for rent as well as the value of the property in the future. The neighborhood will also dictate what kind of tenant you’ll get into your rental property.
A bad neighborhood with cheap rents will bring in an element that doesn’t care about your property at all. While the investment is inexpensive, it wouldn’t be worth holding onto long term. Instead of appreciating in value, the property would likely decline. Investing in rental properties can often mean holding out for the right property in a good neighborhood.
Consider Your Goals
If you are patient and want to have a solid strategy for making a modest sum each month, investing in rental properties is a good long-term strategy. While flipping a property might bring in a quicker return, but it comes with a huge amount of risk and stress.
Benefits of Investing in Rentals
Cash Flow
After receiving a tenant’s rent, you’ll have to pay taxes and the mortgage or make repairs to the property. There’s maintenance that must be done each month to ensure the building stays in good condition. Most landlords are left with a few hundred dollars each month to put into their own pocket. Landlords will often bank that cash and save for another property to double the cash flow they receive.
Tax Advantages
The depreciation of your rental properties can be deducted from your taxes over the next decade or two. The amount deducted will depend on the worth of the home, and in some cases, you can show the depreciation of the property as a loss on your tax return. This saves you, even more, money in taxes each year. You’ll need to discuss your tax concerns with a financial adviser or tax professional to ensure you’re taking the right deductions.
Easier to Finance
One of the biggest advantages to purchasing a rental property versus purchasing a house to repair, renovate and sell is that you’re more likely to get a loan. Many house flippers have to pay cash for the home because its hard to find the financing institution that wants to take a chance on such a risky venture. When purchasing rental properties, the lending company can use the history of other properties to inform their decision to loan you money.
Lower Risk and Less Stress
Compared to investors who buy and flip houses, property owners who become landlords are choosing a low-risk investment strategy. With a house flip, the repairs and renovations can destroy the budget. The home might not sell for the desired amount. In fact, the home might not sell for months after completion. It’s a huge risk. Investing in rental properties means you can be as involved in the monthly operations as you want. Some landlords are completely hands-off and hire a company to deal with renting the units and handling tenants.
Property Appreciates
This is especially true when you purchase the property at below market value and repair it before rental. It can be tough to predict how much the property will appreciate over time, but when the property is in good repair and upgrades are done, it’s definitely likely to be worth more if you end up selling it later. When selling the property, you can decide when it’s the best time to sell too. You can wait out a market that isn’t very favorable at the moment.
Pays Down Mortgage
Each month, the rental payment is applied to the mortgage on the property. That means over the life of the loan, you’re not paying out of your own pocket for the mortgage. After 20 to 30 years, that mortgage can be paid completely, which leaves you with the entire rental amount in your own pocket. While you’ll benefit each month with a rental property, it really shows its true investment potential after the loan has been paid.
Investment in the Future
If you can hold onto the rental property over the years, it makes a great investment to pass down to the next generation. It’s like an heirloom that will make them money for years. Family homes get passed down from one generation to the next, and the same can be done with rental properties.Investing in rental property is a great long-term investment strategy with little risk and
Investing in rental property is a great long-term investment strategy with little risk and low rewards. While the process isn’t for everyone, it’s a great way to ensure that you’re building a portfolio with diverse investments.
