As REALTORS®, we get this question all the time. Investing in real estate can seem a bit overwhelming, especially if you're not familiar with the process or owning real estate in general. Lucky for you, we have a few things to consider when deciding whether or not investing in property is the right move for you.
Let us first say that owning rentals isn't for everyone. It's important to take time to think about both the pros and cons of owning additional homes. It can be a lot of work, so let's overview the cons.
Cash Up Front
In order to purchase a rental property, you'll need to put money down. Typically, lenders require 20% down. Depending on what you're looking for in an investment property and your local housing market, you'll be expected to put down anywhere from $12,000 to $20,000 and up.
In the past, a few programs have existed where less money down is required or there may be special programs to receive the down payment as a gift. However, this is not always the case and absolutely depends on the housing market. Lending products change frequently, so it's always a good idea to speak with a lender early in the process to see what is needed.
Not all tenants are the same. Period. While many are amazing, there will always be those who either don't pay their rent on time or don't take care of your property (or both!). All landlords at some point or another will deal with these issues. There's really no way to get around it.
With that said, however, having a diligent tenant screening process can help weed out the bad eggs. Never be afraid to run a background check on a prospective tenant. Call references. Speak with their employers. As a landlord, you have the right to investigate to be sure that they are a good fit.
Whether someone is living in the home or it's vacant, you're still responsible for the property. This can mean any number of things like a furnace going out on a Friday night in the middle of January or a tenant locking themselves out. As the landlord, you must be available when your tenants need you.
Choose to purchase investment properties in neighborhoods where you feel comfortable. You're not only responsible for the home but you'll also be collecting rent and meeting with tenants during various times of day. Many tenants prefer to pay rent in cash, meaning you may be carrying around large sums of money, depending on the number of properties you own.
City codes exist for investment properties no matter where they are located. And some cities, if not all, have fees associated with rental permits, etc.
"Another downfall could be that sometimes there are special assessments from the city such as rental (investment property) fees."
Okay, so now that we got the cons out of the way, there are many benefits to owning rental property, which is what makes it one of the greatest ways to receive steady returns on your initial investment.
Cashflow & Return on Investment
When you own a rental, your money works for you. Sounds great, right? Finding the right property and spending time evaluating its potential can lead to steady monthly cash flow with (potentially) little work on your part. Not all properties cash flow the same but if you've done your research ahead of time, you're more likely to choose a property that will, of course, benefit you down the road.
Home Equity & Property Appreciation
The tenant is making your mortgage payment on the home, meaning that they are building the equity in your home. Each month as they pay down the loan, your equity increases giving you more buying power and wealth in the future.
And, while your mortgage is being paid for you, the property's value is increasing. Typically cities have fairly consistent appreciation rates. Of course, this varies with market conditions and more; however, rentals are a long-time investment. Think of them like the stock market. You're not going to buy Apple stock today and sell it tomorrow expecting a huge profit margin. Consider investing in property a long-term investment strategy.
Low Entry Cost
As we mentioned above, you need money down up front. However, 20% down really isn't that much to get started with making your money work for you. The down payment really becomes equity in the home and you don't need to save up the full cost of the property from the start. Save up that 20% and start getting paid!
There are several tax advantages to owning property such as depreciation and more. Speak with your REALTOR® about all of the ways investing in rentals can actually help you come tax time!
A good REALTOR® will also "help you find the right property and truly evaluate the profitability for the long run."
Houses require a lot of maintenance but taking care of them doesn't have to be daunting. Assemble a team of trusted professionals such as plumbers, electricians, lenders and more. Having these individuals by your side will no doubt ease some of the burden in finding a last-minute HVAC tech or locksmith. Network and ask around for referrals before the professionals are needed!
So, is investing right for you? Several of our agents are investors themselves and are more than happy to share with you their experiences and what they've learned over the last decade+ on owning rentals!