Is rental property a good investment? Everything you need to know

Georgeta Olaru / 500px

with Stocks sinking and Rising inflationYou might think that buying a rental property is a good place to park your money.

It seems simple enough: buy a house, rent to cover the mortgage and put something down Steady cash in your pocket – All while increasing property prices. Also, Rent is increasing across America

But there is much to consider, since Rising mortgage interest rates To find reliable tenants in local markets. It can also be a surprise expense. Here are answers to common questions about buying a rental property:

Is it worth renting?

It can be – under the right circumstances, over time and depending on your financial situation and goals.

If you are able to afford a few hundred dollars a month all expenses including taxes (income and local property) is paid and you have contributed to a reserve fund for emergency expenses, a rental property can provide reliable returns over time. “Assuming that the property is profitable, coming in with cash flow gives you the opportunity to either buy the same type of property – buy more real estate – or buy other types of property 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.

If you’re considering buying a rental property, it’s easy to get started.

Are rental properties a good investment right now?

If you have your home financed, rental properties can be a good long-term investment, especially as interest rates climb, Meyer says.

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

“One thing I ask people a lot is ‘does the deal make financial sense?’ “Don’t show me something, for example, it’s losing $300 a month and I’m going to tell you it’s a good idea because it’s not possible,” says Meyer. “At a minimum, the asset should have no net carrying cost.”

Is running a rental property too much work?

A lot can go into setting up your rental property, including insurance, homeowner association fees, utilities, advertising, cleaning, maintenance over time, and growing. Mortgage payments And taxes are some important factors, just to name a few.

Some rental property owners hire management firms to take care of the property, with fees typically ranging from 8% to 12% of the monthly rent.

As an investment, rental property can be a slower — but reliable — source of income than flipping a house at the height of the real estate market. Although house prices have risen over the past two years, the pace of that mania has slowed.

A rental property can be a smart investment – if you can afford it. Start exploring your options to determine if this is a good option for you.

How Much Profit Should You Make on a Rental Property?

Once you do the math, and if you plan to hold the property for several years, even a small profit “per door,” or unit, can be a valuable source of income over time, Meyer says.

For example, $100 per month can add up to a net profit (after all payments). If rents typically increase 3% to 5% per year, your profits should increase as well.

“After 20 years, that’s a pretty powerful rental return,” Meyer says. “And that doesn’t include praise.”

What type of loan do you get for investment property?

Rental property owners can apply Mortgages like homeowners, but with several important differences. For one, the down payment is usually very large.

Most lenders require about 25% down for a rental property mortgage, experts say. That’s up from the 6% to 7% that homeowners have paid in recent years.

Lenders view rental property mortgages as riskier than regular mortgages because the investor’s own home loan is likely to take priority during tough times.

What is the best way to finance investment property?

Of course, if you can buy the property for all cash and still have funds left over for a buffer, that’s ideal. Keep in mind, real estate is considered a “liquid” asset—one that you can’t immediately turn into cash in your pocket. Most property investors need or want a mortgage.

Before you apply, make sure you’ve worked out your budget, researched how to attract tenants and have a clear idea of ​​property management costs.

What credit score is required for investment property?

Lenders offer the best rates to borrowers Credit score of 760 or higher.

“Can you get an investment property loan if your score is 680 or 700? Maybe, but you just pay more in interest,” says Meyer.

What percentage can you borrow on a rental property?

It depends. In 2022, as interest rates rise, the strategy of buying a run-down property, fixing it up, raising the rent and borrowing against that property to buy another one is becoming more difficult, Meyer says. Lenders want assurances that the mortgage will be paid off in hard times and will closely examine your assets before making a second loan.

Rental property buyers “should be more careful about their numbers and their interest rate assumptions,” Meyer noted. “Because they’re not going to be able to refinance and take equity out and that property will still be cash flow positive if rates are twice as high as they were a year and a half ago.”

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