Purchasing rental properties is a lucrative investment strategy that anyone can explore. After all, rental properties provide consistent cash flow, tax benefits, and more advantages. However, that’s not to say there aren’t any risks of rental investment. If you don’t prepare and plan out your investment plan, you experience some of the potential risks that turn beginners away. Either way, rental investments can be a great addition to anyone’s investment portfolio. Here’s why beginners should consider investing in rental properties.
Why Are Rental Properties a Good Investment?
Rental properties are a good investment for several reasons. For example, anyone can invest, you can create long-term wealth, and several tax benefits make your investment worth it. However, investing in real estate isn’t necessarily as easy as it sounds. Running a successful rental business takes time, patience, work, and dedication.
Before you start the process of your rental investment, there are several things to keep in mind. First, you need to plan your expenses, save up for emergency costs, research investment areas, and more. Then, you want to figure out how you will make your business successful. Next, we’ll go over how you can succeed with rental property investment.
What Makes a Rental Property Investment Successful?
Investing in real estate can be highly profitable for investors willing to put in the time, work, and money. But, how can your business succeed in the first place? As mentioned earlier, rental properties pose tax benefits, monthly cash flow, and other benefits. Here are some aspects that make rental properties successful.
- Steady Cash Flow
- Tax Benefits
Steady Cash Flow
Owning and operating a rental business allows you to bring in steady cash flow. When you’re a landlord, you set rental rates for each property. Essentially, this means you can decide how much income you bring in.
However, to profit from your rentals, you must have tenants to occupy them. When you have tenants in each of your rental properties, you’re earning income from each monthly rent payment.
Most investors recognize that purchasing a rental property is a significant expense. However, the benefits that follow your investment make the initial cost worth it. When you own and operate a rental business, you can deduct expenses from your taxes each year. For example, most investors make sure to deduct:
- Mortgage interest
- Insurance costs
- Maintenance and repair costs
- Management costs
- Property taxes
- And more
If you plan to hold onto your rental property for several years, appreciation is another benefit. Many investors hold onto a property for several years in hopes of selling it later on for a significant profit. However, keep in mind that appreciation isn’t guaranteed–several factors determine real estate appreciation.
Most owners expect property in a great location to appreciate between 1% and 5% each year. Here are some of the factors that determine rental property appreciation.
- Population growth– An increase in population and job opportunities brings more people in and can add to the appreciation of a home in a good location.
- Fixed supply– One area only has so much space available. An increased population creates more demand, driving up price and value.
- Equity– As real estate owners make payments on a rental, the difference between the value and any debt on the home contributes to the overall value. Combining the area’s average appreciation rate with paying the loan principal equals the home’s equity.
Finally, amortization is another beneficial aspect of rental property investing. Each month you collect rental payments, those finances contribute to paying the mortgage. As the years go by, rental owners pay more on the mortgage than the previous year, so more equity is built up. A bonus is that your tenants are helping you pay down the principal.
Getting Started with Your Property Investment
Getting started with your rental investment doesn’t have to be overcomplicated, as long as you know what steps to take. It’s essential not to rush into anything if you’re not prepared financially. Here are a few tips to keep in mind while starting your investment process.
- Evaluate Personal Finances
- Start at the Bank
- Research Your Investment Area
Evaluate Personal Finances
It’s hard to invest if you don’t know what your personal finances look like. Although rental properties can be a lucrative investment, you need to be able to cover the costs if your units are vacant or need repairs.
Typically, rental owners want to set aside at least six months of income to budget for any expenses. Additionally, having an emergency fund to prepare for unexpected costs can relieve stress and protect your investment.
Start at the Bank
When you decide you’re going to make a real estate investment, you may be tempted to look for properties right away. However, you’ll want to backtrack a little bit. So before you start looking for a profitable investment, begin at the bank instead.
After all, buying a rental property is different than purchasing an owner-occupied home. Most banks require a larger down payment and top-notch credit history. So, before you dive into your property search, talk with a local banker to learn your requirements and qualifications.
Research Your Investment Area
Once you’ve talked to a banker and approved for a mortgage, start looking for profitable investment areas. After all, location is one of the most critical factors of a rental property. Investors will want to research and understand the rental market to make wise investment decisions. Here are some factors to consider when researching a location:
- Average rental prices
- Lucrative neighborhoods
- Current rentals on the market
- Local schools and job opportunities
- Crime rate
What Are the Risks of Rental Investment?
To say there are no risks of rental investment is a bit naive. Like any significant financial investment, there are risks and benefits. Here are some of the most significant risks of rental investment.
- Dwindling Cash Flow
- Investing in Old Properties
- Poor Management
Dwindling Cash Flow
Cash flow isn’t guaranteed with a rental investment. Instead, you need to work to obtain positive cash flow. While it’s unlikely you’ll have to lower monthly rent prices, you can still lose out on profits if you don’t plan expenses accordingly. To ensure you generate positive cash flow, plan costs, and save funds for emergencies.
You’re more likely to run into extensive repairs or renovations if you buy an old property. Unfortunately, properties older than 100 years can experience significant problems that can wipe out equity. For example, a structural or foundational issue within a property can make a property uninhabitable and cost thousands of dollars to repair.
Property management is a huge part of owning rental properties. If you don’t stay up-to-date with maintenance, repairs, tenant screenings, rent collection, and more, it can be detrimental to your business. As such, it is a good idea for rental owners to hire property management in Northern Virginia.
Strategies for New Rental Investors
If you’re hoping to get started in real estate, don’t get too caught up in the risks of rental investment. Instead, work to improve your investment strategy to ensure a successful rental business. Here are a few ideas to keep in mind if you’re hoping to start real estate investing.
- Diversify Your Property Types- Single-family homes aren’t the only properties to invest in. Consider investing in multi-family buildings or commercial properties as well.
- Find the Right Locations- Since location is one of the most important aspects of rental property investment, finding a profitable location is key.
- Know Your Legal Obligations- No landlord wants to run into legal issues with a lease agreement or tax situation. As such, investors must read up on legal obligations and comply with all local, state, and federal laws.
- Hire Property Management- Hiring a trustworthy property management team can help you run a successful business. Since landlords are so busy, many don’t have time for all the tasks and paperwork of housing tenants.
Need Help Maximizing Your Rental Business?
Whether you’re an established or a first-time investor, managing rental properties can be a ton of work. Luckily, you aren’t on your own. Local property management companies, such as Professional Property Management in Northern Virginia, are here to help.
Our trusted professionals can assist with all daily, monthly, and annual tasks associated with running a rental business. If you’re looking for management services in Northern Virginia, reach out to your local specialists today.