Considering Buying Rental Real Estate as an Investment?
If you are looking for a great investment opportunity one of the best choices out there is Real Estate Rental Properties and there are many reasons why there is so much potential in this area.
Of all the investment choices available Real Estate has some significant advantages. It is one of the only investments that you can use a fractional amount of investment capital and leverage appreciation against a much larger value investment (Full Value of the Home) to your benefit. More simply stated for your small down payment or "investment" in a property, you are getting the benefit of appreciation based on the total market value of the home, not just your cash input.
For example, a down payment of 20% in a $200,000.00 Home would mean a cash investment of $40,000.00. If the market gains 5% in the next year your initial cash investment placed in a typical mutual fund would only show a return of about 5-6% or less, so about $2400.00 on the high end. However, the same amount of investment in our example would yield $10,000.00 in the form of increased equity in the property. A very handsome return of 25% on your initial cash investment.
Other advantages with Rental Properties can sweeten the deal even more. It is the only investment that offers tax advantages in the form of an interest deduction on your taxable income and at the same time, you are able to receive cash flow (income from the investment). If you are willing to make capital improvements the property will also gain equity at the same time you are taking a depreciation. Tax treatment of Rental Homes can, of course, be a little tricky and it is always best to consult a licensed CPA to understand and take advantage of all the benefits but, there are several portfolio building strategies currently allowable to transfer your equity at the time of sale into larger more profitable investments like multifamily homes or apartment buildings while deferring any capital gains taxes into the future.
Get Some Guidance Early
Whether you are a seasoned pro or first-time investor there is no substitute for having a knowledgeable Real Estate Broker to assist you and get you in front of the right choices. Buying rental homes is not the same as buying a home you might want to live in and understanding what makes a good buy for a rental involves many factors.
Of course, the location of the property is very important but, it may be even more important to understand the tenant demand for property in areas you are considering for your purchase. What are the average rental rates, is there seasonal demand that varies with time of year, and what is the typical turnover rate? All of these considerations should be carefully evaluated before you buy, including projections for future growth and the impact anticipated changes in demographics may have on future appreciation and growth in the area.
While properties may be in demand for a particular segment of the marketplace, they may be completely undesirable for another segment. Usually, properties that will serve across a very broad range of appeal tend to serve better and work for the best returns.
Another very important consideration is the architecture and maintainability of the property. The more complex the property is and the larger they are the more work that is involved in make-ready between tenants. Quality of construction, age, included appliances, and other amenities may be well suited for a live-in property but, may not return the best premiums for rentals.
Manage your Investments
Unlike more passive investments in Stocks, Mutual Funds, or CD’s, Real Estate must be closely managed. If improperly selected tenants can not only be a liability but they can quickly become a nightmare. In all cases, it is critically important to be certain that the rules and regulations, covenants and restrictions in the area are closely adhered to by your tenants. Sometimes not paying rent, causing complaints with neighbors, or damaging the property can be very costly and have a huge negative impact on your investment. The best Brokers can assist you with tenant acquisition after your purchase and in some cases, either manage the property for you directly or refer you to a professional property manager.
Reaping the Rewards
Getting started on the right foot with a solid investment in a rental property will pave the pathway for you to gain equity and reap the benefits of ownership. As you gain experience and begin to have a greater understanding of the costs –vs- benefits you will learn what makes the most sense for your strategy. If you are interested in long term growth or buy renovate, lease, and flip, or portfolio building toward larger holdings. Rental homes are a great way to find a scalable income-producing investment that can supplement your income, build passive wealth, create a secure retirement, and/or build an estate to hand down to your family.
Questions, Comments, Concerns
I have over thirty years of experience with Rental Properties, both my own personal investments and with my clients, finding, buying, selling, leasing, and exchanging Rental Income Properties. I have all the systems, knowledge, experience, and connections you need to get started or continue on the path if you have already begun, toward building a more robust rental investment portfolio and I would love to hear from you.
Let me know your thoughts on the subject or how I can help.
Real Estate Broker Associate
RE/MAX Capital City
(512)964-6100 or Email: Eric@EasywithEric.com