Is Rental Property a Good Investment for You?
February 8, 2013
Letâ€™s forget about the last five or six years for a moment â€“ historically, rental property has been one of the best investments available. Not only can you use rental income to pay the carrying expenses on the property, but equity builds up over time creating large future investment windfalls. In addition, rental property can be leveraged so that youâ€™re getting a higher return on your upfront investment.
Thatâ€™s traditionally how rental properties worked, and itâ€™s a solid bet that it will eventually return to that status in the future. Whatâ€™s more, the real estate collapse of the past few years has lowered prices to where rental property makes more sense than it has in a very long time.
Though some people are well suited to invest in rental property, most arenâ€™t. Potential returns can be very high, but rental property is a more complicated investment than most others. How do you know if rental property a good investment for you?
Why Investing in Rental Property Can Work for You
This list certainly isnâ€™t all-inclusive, but it considers both market factors and personal preferences.
1. You want a venture that is largely passive and wonâ€™t take up too much time.
If you are looking to create additional income streams, rental property is a way to do it without having to put in the kind of time that would be required for a more traditional business. Rental property isnâ€™t completely passive, but once you get it up and running it can close to take care of itself with only minimal involvement from you.
2. You don’t like the investment alternatives.
With a lack of credible investment options, rental property could be the best place for your money. The stock market is near record highs and looking a little top-heavy, and interest rates on fixed income investments are at record lows. But if you can get a rental property that will at least break even on a month-to-month basis, your return will come in the form of either future real estate appreciation, the gradual pay down and payoff of the mortgage, or combination of both. In addition, youâ€™ll have more direct control over a rental property investment than you will over stocks and bonds.
3. Youâ€™re looking to invest in something tangible.
Most investments today are sitting in paper â€“ stocks, bonds, certificates of deposit, treasury securities. Even commodity futures involve paper, since you never actually take physical possession of the assets. If youâ€™re looking to invest in something tangible, there are basically two choices: precious metals and real estate. Precious metals provide no income, and can be highly speculative. Rental property on the other hand, has rental income, and holds the prospect of rising equity in the future. Not only is it something you can put your hands on, but you can also wrap your mind around exactly what it is.
4. You’re a hands-on repair type.
If you’re handy when it comes to repairs, rental property could be your niche. That doesn’t mean you have to be able to perform all repairs, but you if you can at least size up a job and know what will be involved, you’ll have a big advantage going in.
5. You’re seeing bargains all over the place.
As a more practical matter, house prices are down in most markets and way down in some. This creates a real buying opportunity for real estate investors. Not only are general price levels down, but you can often get real deals on short sales and foreclosures. This provides an opportunity to buy rental property at well below market prices. If you do that, the carrying costs on the property will also be lower, raising the prospect of a positive cash flow from the start.
Why You Might Want to Avoid Investing in Rental Property
As noted at the beginning of this post, rental properties are not the right investment for everyone. Here are some reasons why it may not work for you.
1. Your financial profile isn’t what it needs to be.
Now that weâ€™ve been through the mortgage meltdown, mortgages are harder to get in general, but nowhere more so than for rental property. Mortgage lenders took a big hit on loans for rental property during the meltdown, and have imposed significant restrictions. Youâ€™ll have to have larger down payments, more reliable income sources and better credit than investors in the past. Your credit and financial profile will have to be up to the task.
2. You donâ€™t like very long-term investments.
Rental property is a long-term investment in the true sense. While you can sometimes buy properties on the cheap and then flip them for a sizable profit, the soft housing market has made that difficult to do in a lot of areas. You will have to buy a property, and then wait for mortgage amortization and higher prices in the future to provide your return. Also, rental property isnâ€™t nearly as liquid as other investments. If you decide you want out you wonâ€™t be able to make that happen with a phone call or a mobile app the way you would for stocks or mutual funds. It could take a year or more to sell a rental property. If you donâ€™t want your money tied up for that length of time, rental property is probably not for you.
3. You donâ€™t like midnight repair calls.
One the un-anticipated tasks of a landlord is shielding tenants from property related issues. If you own a house that you live in, you will be responsible for any repairs that need to be done. But as a tenant, if something breaks down, you pick up the phone and call your landlord. And it always seems to happen around midnight! If this is not an arrangement that works for you, rental property will not be a good idea.
4. You donâ€™t want investments youâ€™ll have to actively manage.
On the income side, rental property is pretty passive. Rent checks come in, and you use that money to pay the bills associated with ownership of the property. But management becomes more active when repairs are needed or when a tenant moves out and needs to be replaced. At times like these, rental property can seem more like a heavy part-time job than a passive activity. If you like your investments completely passive â€“ the way stocks and bonds are â€“ rental property may not be a good fit for you.
Unlike other investment types that are more conventional in nature, owning rental property will have an effect on your personal life and on your financial situation. You canâ€™t just wake up one day and decide you want to invest in rental property. Itâ€™s a venture that requires planning as well as consideration of your personal circumstances. Though it can be highly profitable, you need to consider all factors before making an investment.
Do you own rental property, or have you owned any in the past? What would you advise someone who is considering buying rental property?
All posts by Kevin Mercadante