If you are new to the real estate industry, owning rental homes is a great way to get started. Not only may owning rental property help you accumulate long-term wealth, but it’ll also set you up for a financially stable future if you take the appropriate steps and plan accordingly. That said, the benefits of owning rental property are simply too great to pass over.
While you’ve probably seen shows on channels like HGTV about house flipping, I can assure you they don’t paint the whole investing picture. There is an equally impressive exit strategy that may not be as fun to show on television, but is nonetheless a viable wealth-building vehicle: rental real estate investing. Owning rental homes may be less flashy, but the unique combination of capital growth, ongoing cash flow, and significant tax benefits make it a strategy that is hard to beat.
Don’t get me wrong; there is plenty of work that goes into owning a rental property, especially if you choose not to hire a property management company. Dealing with and evicting tenants, late night maintenance calls, and finding the right property are just a few hurdles rental property investors regularly face. However, if you mind your due diligence and take the time to find a rental property the right way, you will reap the rewards.
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What You Should Know Before Owning Rental Houses
Buying a rental house can be a great investment, but not everyone is not cut out to own rental property. Here are some things that you should know or consider before you set out to buy your own rental home.
Pay Down Personal Debt First
Taking on the financial responsibility of owning a rental property might not be a good idea if you have a lot of personal debt. Owning a rental property is expensive, and you must be prepared to cover all costs in case you have a vacancy, or have trouble with a tenant not paying rent on time.
If you’re dealing with high monthly payments for debt such as student loans or medical bills, taking on the financial burden or a rental property might not be the best move. It’s advised that you have a financial cushion before you move forward.
Are You Ready To Be A Landlord?
Not everyone is cut out to be a landlord, and that’s okay. Take time to reflect whether or not you’re truly landlord material. Do you have the patience to deal with difficult tenants? Are you okay with being called at 2 A.M. to fix a clogged toilet?
Hiring a property manager could be a great solution if you have room in your rental budget.
Secure At Least A 20% Down Payment
You may not be aware that the lending terms for an investment property are more strict than those for a primary residence. You must be prepared to put down at least 20 percent of your rental property’s value to get approved.
Should You Buy Or Finance A Rental House?
Last but not least, consider whether you should buy or finance your rental home. Paying all cash up front for your rental property can help you generate positive cash flow immediately. Unfortunately, not everyone has that sort of money up front.
Luckily, financing could potentially get you a better return overall. If you put down 20 percent on the house, and secure a low interest rate, your annual return on your investment might be higher than if you bought the house outright. Be sure to consider your monthly cash flow and your return on investment before making a decision.
Pros Of Owning Rental Houses
The benefits of owning rental homes include, but are not limited to:
- It’s Easy To Get Started: You don’t have to be a savvy businessman or businesswoman to start owning rental homes. You can simply be an individual looking to be freed from the burden of a nine-to-five. It is, of course, important to heavily research the market where you plan to invest, along with basic strategies for how to market and maintain your property; but it is not as complicated as it sounds.
- You Get To Be Your Own Boss: One of the best benefits of owning a rental property is the fact that you don’t have to answer to anyone. Of course, you may need to respond to your tenant’s inquiries, but you can also hire a property manager to do it for you. More specifically, however, today’s investors are their own bosses.
- Passive Income: Assuming your rental property is occupied with tenants, you will be able to receive a steady stream of monthly income (while also paying down your mortgage). If you choose to utilize a property management company, owning rental homes is as passive as it gets.
- Appreciation: In addition to the cash flow received from tenants, passive income investors may also realize appreciation. And while appreciation isn’t guaranteed, history has taught us that it happens more often than not.
- Tax Benefits: Owning rental homes coincides with several tax benefits, not the least of which includes depreciation––one of the best benefits of all. There are a number of tax benefits, each of which may deduct from your taxable obligations and save you money over the course of ownership.
- Pay Down Your Mortgage With Other People’s Money: It is entirely possible to pay off your mortgage obligations with other people’s money when the property’s cash flow is reliable.
There will always be some risk involved when it comes to owning rental properties. However, if you stay dedicated to maintaining your property, you should be rewarded accordingly.
Cons of Owning Rental Houses
Owning rental houses is not without its own set of drawbacks. Here are the possible cons associated with owning rental houses:
- You may sometimes have to deal with difficult tenants.
- Selling your property will take time, in case you have an emergency or need cash.
- The success of your property is contingent upon finding the right tenant who pays their rent on time and doesn’t cause legal issues.
- You have to be prepared to perform routine maintenance and repairs, or outsource tasks for a costly fee.
- You are the sole person who is responsible for paying the bills, including property taxes, mortgage payments, insurance, and utilities.
Rental Property Tips
Let’s make one thing perfectly clear: not all rental property tips are created equal, nor can they all be applied universally to each and every investment opportunity. That said, what works for one passive income investor may be written off by another, and vice versa. However, it is worth noting that there are at least three rental investment tips that can be applied to every impending deal. To that end, investing in rental real estate can be made easier and more risk averse by following these rental property tips:
- Mind Your Own Due Diligence: Owning rental homes, at least successfully, is impossible without minding due diligence. Therefore, it’s in your best interest to do the appropriate research, and perhaps even a little more. Don’t take everything you hear as gospel; cross reference the data with other respectable sources to formulate your own opinion.
- Calculate Costs Accordingly: While owning a rental property can be an extremely lucrative investment, there are numerous costs that keep real estate entrepreneurs from taking the leap. That said, there are a number of costs to account for. Everything from the down payment and acquisition cost must be factored into your decision, but there are a lot more to keep an eye on. More importantly, there are ongoing costs you will incur after the purchase. Don’t make the mistake of thinking costs will disappear once you buy the home and put a tenant in it. Have a fund set aside to manage costs, and you’ll find the process much more enjoyable.
- Find The Best Location: The golden rule of real estate investing is not lost on owning rental properties: location, location, location. The most important factor to consider before buying a rental property is the location. Buying in a desirable location will all but ensure demand remains constant. And what is a great rental property if not for one that is always in demand. That said, you would be wise to buy in a location with potential, or when that already exhibits a propensity for demand.
Owning rental homes has proven that it belongs in today’s growing pantheon of viable exit strategies. There isn’t another exit strategy, at least that I am aware of, that awards savvy investors the ability to build wealth more passively. What’s more, the benefits don’t stop there; smart investors are awarded the luxury of several other benefits, each as attractive as the last.