Investing in a rental property and securing reliable tenants can be an excellent way to secure passive income. If you’re thinking of investing in a rental property, make sure you understand the advantages and disadvantages that come with this investment option.
When it comes to property investing, it’s easy to feel intimidated by the sheer volume of information available to novice investors. Although investing in property can be a time-consuming and stressful process, making the right property investment is one of the best ways to get on the fast-track to financial independence.
What is Rental Property Investing?
There are several different ways to invest in property, including house flipping, rental property investing, and REIT investing. Rental property investing is when you purchase a property in order to secure rental income from commercial or residential tenants. A rental property purchase can be paid for outright or financed via a mortgage.
Signs You’re Ready to Invest in Rental Property
While the decision to begin investing in rental property is ultimately up to you, it’s important to take stock of your financial and personal circumstances before making such a significant purchase. The following three questions may help gauge if you’re ready to invest in rental property:
- Is your cash flow capable of withstanding prolonged periods of low tenant demand and declines in rental property value?
- Are you knowledgeable and passionate about investing in rental property?
- Will any current or future personal/family responsibilities prevent you from managing and maintaining a rental property?
If you answered “yes” to these questions, you can take it as a strong sign that you are ready to invest in rental property.
The Pros and Cons of Investing in Rental Properties
Like any investment, it’s important that you understand the benefits and limitations of owning a rental property. When you recognize the pros and cons of rental property investment, you can calculate whether this investment option suits your personal circumstances and long-term financial goals.
The most immediate benefit of rental property investing is the income you derive from renters. Ideally, your rental income should offset the mortgage and/or managing expenses incurred by the rental property. If a rental property sustains positive rental yield, you can use the increased annual cash flow to renovate the property, purchase another property, or diversify your investment portfolio.
Property Value Growth
Owning a rental property means that you benefit from any gains in the underlying value of the property. Property value growth is largely driven by external variables, such as population growth, nationwide economic performance, and neighborhood development.
Although meaningful property value increases are not certain, you can increase your chance of benefiting from property value growth by researching historic pricing data and projected development trends for the locations of potential rental properties prior to purchase.
There are a significant number of tax concessions you can claim for managing and maintaining a rental property. On a mortgaged rental property, you can claim annual loan interest and any origination fees as tax-deductible expenses.
As long as you can justify a relation to managing your rental property, the following expenses also include tax-deductible components:
- Maintenance and repair work.
- Property condition depreciation.
- Legal and management fees.
- Travel expenses.
Purchasing a rental property, whether it is up front or via a mortgage, is a significant concentration of assets for the average investor. As a non-liquid and non-diversified asset, a rental property is exposed to risk from rapid declines in both local tenant demand and local property values.
Long-term tenants who reliably pay rent on time are highly valued by rental property owners. Unfortunately, a non-trivial percentage of tenants will either be late on rental payments or will not even bother paying their rent at all. If this happens to you, it can mean weeks or even months of lost rental income while you go through the process of tenant eviction.
There’s no getting around the active role of investing in a rental property. Choosing reliable tenants, maintaining property condition, ordering repairs, and conducting house inspections are just some of the responsibilities of a rental property owner. However, if you have no interest in active management, you can delegate these tasks to an external management company.
Still Confused? Take the time to Consult an Experienced Agent.
If you’re a novice investor or if you’re still unsure about rental property investing in general, consider reaching out to a local Clever Partner agent that specializes in investment properties. An experienced, full-service real estate agent can identify and break down an investment strategy that suits your personal circumstances and accelerates your long-term financial goals.