With constantly rising inflation, a secondary source of income is no longer just a privilege but a necessity to survive. Buying a property as an investment and renting it out is a common method people choose for that extra source of money. However, purchasing a rental property comes with its challenges. One needs to have sufficient knowledge of the current real estate market and do a thorough risk and reward analysis before buying a rental property. We provide a detailed guide to help you through the journey of investing in a rental property after in-depth market research and finally choosing the best-suited option.
Why Invest in a Rental Property?
If bought mindfully and used well, rental properties are a great source of additional income. Of course, becoming a rental property owner comes with its own responsibilities. But it can still be handled on the side while continuing your job. It also comes with other benefits like high return on investment (ROI), tax benefits, and a long-term income source that continues even after retirement.
Types of Rental Properties
There are different types of properties in which one can invest to earn a passive income. The rental properties can fall under the following broad categories-
- Residential: Properties rented as housing units are the most common due to the increasing demand.
- Industrial: The factories and warehouses come under this category.
- Commercial: All the offices and retail units rented to businesses come under this category.
Where Should You Buy the Rental Property?
The location of any rental property plays one of the most critical roles. It decides whether it would be a beneficial investment or a financial drain. The type of promising rental property also changes from location to location.
One should explore the places where the roads and public transportation connect them. Alongside, closeness to other facilities, like restaurants, parks, hospitals, schools, and shops, are usually good investment options. One should also look out for properties in areas where the crime rate is low. Locations with low property taxes also turn the investment more profitable.
Things to Consider Before Investing
Property investment is a competitive field with a lot of big players. So, one must invest in the rental property after careful evaluation and study. Below are the things that must be considered and examined before stepping into this arena.
- Finances: First, know your budget. Consult a bank to explore mortgage loan options. Exploring financial options would help you decide the price range for your property search.
- Market Research: Doing detailed research on rental properties in demand, profitable locations, and developing areas are essential before making any decisions. Look for properties available within your budget and the average market price of similar options. This research allows you to settle on the type and purpose of the property for investment.
- Location: After doing the needed research, the time to decide upon the location is next. A site that is well-connected to other basic facilities is preferred.
- Property Search and Potential: Once you choose the profitable areas, the search begins for potential properties within the budget.
- Risk-Reward Analysis: Investing in rental properties must bear profits for the buyer. Therefore, one must consider all the pros and cons related to the potential properties. For this, investors calculate return on investment (ROI) using the annual costs, rental income, and mortgage value.
Cost-Benefit Analysis of Buying a Rental Property
A lot goes into being a landlord of a rental property than just buying and renting it. The whole renting process requires dedication, time, effort, and money. After purchasing, the landlord must prep it for rental, find a trustworthy tenant, and regularly check the unit for maintenance. So, here’s a cost-benefit analysis of entering into the rental business.
Costs:
- The expenses of entering and exiting the rental business can be high.
- There may be times when it won’t generate any rent when tenants are not available.
- The landlord has to pay the maintenance and other monthly charges even when the unit is empty after the tenant has moved out.
- The overall rental income decreases due to the additional property management costs.
- The rental property can not be liquified. And it takes several months to find a buyer who would pay a reasonable price while selling it.
- If it is a mortgaged property, there is a chance that the monthly rental income may not cover the monthly loan payment.
Benefits:
- The rental property acts as a tangible asset that has a physical form. Therefore, it can be considered an investment that has protection from inflation and can bring immediate satisfaction with its use.
- The property holds the potential of increased consumption due to its price appreciation with the increase in real estate value.
- The income earned through rentals is passive and does not require full-time attention. It also allows the landlord to continue with a regular job simultaneously.
- Income earned through the rentals does not come under the Social Security tax.
- You can even rent out any extra space or room in your home if the local rules allow it. In this way, you can decrease the additional property management charges you would pay in the case of a separate property.
- If it is a mortgaged rental property, the interest thus paid on it may be used to deduct taxes.
Conclusion
Buying a property is a big investment decision that requires one to put a lot of thought into it before taking the final call. Details like information on mortgage loans, real estate market trends, and property management are crucial to have and understand. Although such investments have a certain level of risk, the benefits surely outdo them. The key to successful rental property investment is making a well-researched and careful decision suiting individual financial needs and capabilities.