Is the rental property a good investment?  All you need to know

Is the rental property a good investment? All you need to know

Real estate brokerage agent in the analysis and decision phase

Georgeta Olaru / 500px


With stocks are falling And rising inflationyou may be wondering if buying a rental property is a good place to park your money.

It seems simple enough: buy a house, rent it at a price to cover the mortgage and put some steady money in your pocket – all while the values ​​of the properties rise. More, rents are on the rise across the United States

But there is a lot to consider, from increased interest rates on mortgages to local markets to find reliable tenants. There may also be surprise charges. Here are some answers to the most frequently asked questions about buying a rental property:

Is it worth having a rental property?

It can be – in the right circumstances, over time and based on your financial position and goals.

If you can collect even a few hundred dollars a month once all expenses, including taxes (income and local property) are paid and you have contributed to a reserve fund for emergency expenses, a rental property can provide a reliable return over time. “Assuming the property is profitable, having that cash flow in gives you the opportunity to buy more assets of the same type – buy more properties – or buy other types of assets when [real estate] is out of favor, ”says Cynthia Meyer, a certified financial planner (CFP) with Real Life Planning in Gladstone, New Jersey who works with real estate investors.

Are rental properties a good investment right now?

If you have your financial home in order, especially when interest rates go up, rental properties can be a good long-term investment, Meyer says.

A rental property should generate a monthly income, even if it’s only a few dollars at first. Do the math to make sure the property you are considering is right for you. Consult a local financial advisor or real estate expert.

“One thing I’ve often asked people is ‘does the deal make financial sense?’ Don’t show me something, for example, that is losing $ 300 a month and expect me to tell you it’s a good idea because it probably isn’t, ”Meyer says. “At a minimum, there should be no net loading costs for the property.”Is managing a rental property very tiring?

A lot may be needed to set up your rental property, including insurance, homeowner association fees, utilities, advertising, cleaning, over time repairs, increase mortgage payments and taxes are some critical factors, just to name a few.

Some rental property owners hire management companies to take care of the property, with commissions typically ranging between 8% and 12% of the monthly rent collected.

As an investment, a rental property can be a slower but more reliable source of income than a home in the midst of a booming real estate market. Although household values ​​have soared over the past couple of years, that frenzied pace is slowing down.

How much profit should you make on a rental property?

Once you’ve done the math, and if you’re planning on holding the property for a number of years, even a small profit “per door” or unit can be a valuable source of income over time, Meyer says.

For example, a net profit of $ 100 per month (after everything is paid off) can add up. If rents typically increase 3% to 5% per year, your profit should also increase.

“After 20 years, this is a pretty powerful return on rent,” says Meyer. “And that doesn’t include appreciation.”

What kind of loan do you get for a real estate investment?

Owners of rental properties can apply mortgages like homeowners, but with very important differences. For one, the down payment is typically much larger.

Most lenders require around 25% less for a rental property mortgage, experts say. This contrasts with the 6% to 7% paid by homeowners in recent years.

Lenders view a rental home loan as riskier than a regular mortgage because an investor’s home loan is likely to take priority in tough times.

What is the best way to finance a real estate investment?

Of course, if you can buy a property with all the cash and still have some buffer funds, that’s ideal. Keep in mind that real estate is considered an “illiquid” asset, one that you cannot quickly turn into cash in your pocket. Most real estate investors apply for or want a mortgage.

Before applying, make sure you’ve completed your budget, researched how to attract tenants, and have a clear idea of ​​the property’s running costs.

What credit score is needed for a real estate investment?

Lenders tend to give the best rates to borrowers with credit scores of 760 or higher.

“Could you get a real estate investment loan if your score was 680 or 700? Probably, but you’d just pay more interest,” Meyer says.

What percentage can you borrow on a rental property?

It depends. In 2022, as interest rates rise, the strategy of buying a ruined property, fixing it, raising the rent, and then borrowing against that property to buy another is becoming more difficult, Meyer says. Lenders want assurances that the mortgage will be paid off in tough times and will carefully examine your property before granting a second loan.

Buyers of rental properties “need to be even more careful with their numbers and their assumptions about interest rates,” Meyer noted. “Because they won’t be able to refinance and withdraw stock and still have that positive cash flow property if the rates are twice as high as they were a year and a half ago.”

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