Buy A Rental Property Or Invest REPACK
Home prices in the U.S. have historically increased in value, although there are also periods of declines. For example, as the Federal Reserve reports, the median sales price of houses sold in the U.S. has increased by more than 64% over the past decade. In other words, an investor may be able to make a profit by purchasing and maintaining a rental property over the long term.
buy a rental property or invest
The tax benefits available to owners of real estate provide another reason for buying rental property. The Internal Revenue Code is friendly to investment property owners, with tax-deductible expenses such as:
If an investor finances the rental property using a 25% down payment ($25,000 down), the mortgage principal and interest expense would run about $4,200 per year for a net cash flow of $2,800 ($7,000 NOI - $4,200 debt service).
A big down payment is one of the main reasons people think that they shouldn't buy a rental property. Most lenders require 25% down on an investment property, so if a property costs $100,0000 the down payment would be $25,000 (excluding closing costs, impound accounts, and cash reserves).
Buying a good rental property and hiring a great local property manager can help to keep rental income high and operating expenses reasonable. However, one of the biggest variables that is difficult to control is property taxes on a rental property.
The good news is that there are some things investors do to help reduce the risk of rising taxes, such as buying a rental property in a state with property and income taxes in mind. Some sunbelt states, such as Arizona, Alabama, and Florida have low property tax rates and low or no state income tax rates.
Owning a rental property can be a good way to diversify an investment portfolio away from traditional stocks and bonds, and building a portfolio of cash flowing rental properties can be a good way to generate extra income.
Jeff has over 25 years of experience in all segments of the real estate industry including investing, brokerage, residential, commercial, and property management. While his real estate business runs on autopilot, he writes articles to help other investors grow and manage their real estate portfolios.
According to Statista, in 2020 there were 14.1 million households (representing 42 million residents) renting single-family houses in the U.S., and Urban.org predicts there will be a 21% increase in total rental households between 2020 and 2040.
While investing in single-family rental (SFR) properties can sometimes provide both current cash flow and long-term appreciation, building a rental real estate portfolio generally requires time, energy, and a willingness to fine-tune your approach in response to evolving market conditions.
Even real estate investors who hire a local property management company may still need to remain involved in the oversight of their investments. For example, investors may be asked to authorize certain improvements or repairs and to regularly review monthly and year-end financial statements, such as the income statement and net cash flow report.
Despite best tenant screening processes, an investor may end up with a tenant who pays the rent late or needs to be evicted. Lost rental income and the added cost of an eviction can sometimes eat away at potential profits and overall returns, and overseeing an eviction process can be time consuming.
Notwithstanding the associated responsibilities, a good investment property can provide the perfect trifecta of recurring rental income, long-term appreciation in property value, and tax benefits related to mortgage interest, operating expenses, and depreciation.
Financing a single-family rental property works a little differently than applying for a mortgage on a primary residence. Down payments can be bigger, lender fees and interest rates are usually slightly higher, and there are different requirements to qualify:
Although there may be more hoops to jump through when arranging financing on a rental property, the good news is that there are a lot of options available. Conventional lenders, such as banks and credit unions, offer loans backed by Fannie Mae or Freddie Mac, while other investors obtain rental property financing through private lenders or by forming a joint venture.
A good place to begin looking for a rental property loan or refinance is the Stessa Mortgage Center. Simply answer a few questions online, and the platform will generate competitive mortgage quotes specifically designed for investment property purchases and refinances.
Return on investment (ROI) is a financial metric that real estate investors use to help determine how potentially profitable an investment property might be. To calculate the ROI of a property, an investor needs to:
For example, assume you purchase a rental property for $250,000 and it produces an annual rental income of $24,000. Let's say operating expenses are 40% of projected income and the annual mortgage interest expense is $11,000.
You can use the free rental property analyzer in this post to forecast the potential return of a property. Simply enter some information to view projected key metrics, including cash flow, cash-on-cash return, net operating income, and cap rate.
Our Roofstock 360 platform offers a low-friction path to direct SFR ownership that keeps you in control of all major decisions. Roofstock One offers access to a curated basket of diversified SFR investments in increments as low as $5,000. And for more DIY investors that prefer to partner with local agents in specific markets, there's the Roofstock Marketplace.
Once you've closed on your rental property acquisition, it's time to focus on tenant relations and other important operational aspects. Two key areas that require immediate attention include tracking income and expenses and sorting out property management.
Even for experienced real estate investors, keeping track of rental property income and expenses can quickly become overwhelming. Common income and costs that affect the return on a rental home include:
After signing up for an account, simply enter the rental property address, connect business banking and mortgage accounts quickly and securely, and run reports such as the income statement, net cash flow, and capital expenses.
With Stessa, investors can easily maximize rental property profits through smart money management, automated income and expense tracking, and personalized recommendations for maximizing revenue based on unique portfolio and investment strategies.
Being a landlord can be more time-consuming than it might appear. Finding and screening tenants, collecting the rent, and taking care of repairs are only some of the duties required for successfully managing a rental property.
Owners also need to comply with local and state landlord-tenant laws, the Fair Housing Act, conduct periodic property inspections, run regular rent comparables, and obtain the best prices from qualified vendors to help with keeping operating expenses under control and growing rental property returns.
As housing prices continue to rise, finding funds to make a big down payment to buy a rental property is becoming more difficult in some real estate markets. Fortunately, there are several alternative strategies for buying a rental property that require less money:
Unpopular opinion: Investing in the stock market is better than investing in real estate over the long term. Put simply, an investment in real estate earns just three to four percent per year historically; on the contrary, investments in the stock market post about 10 percent annual returns. That can amount to an impressive return on investment (ROI).
There are a wealth of ways to earn a passive income, including both investing in real estate property and investing in the stock market, whether you choose to put your money in stocks, exchange-traded funds (ETFs), bonds, or other assets.
First, you should seek to identify what is the best way to make a passive income in real estate. One of the most lucrative ways to make money in real estate is by buying up rental properties and, well, renting them out to others who foot the bills for you. When you rent them, the tenants essentially help to pay off your mortgage and, ideally, you can earn a passive income on top of that.
When you invest in the stock market with index funds, dividend stocks, ETFs, bonds, and other assets, however, you can be more hands off with a lot less upfront costs. (This is especially true when you invest with technology like Q.ai, which automatically allocates your funds for you. All you have to do is select your investment strategy and sit back while artificial intelligence crunches the numbers.)
Plus, you can also choose to invest in real estate by investing in real estate trusts and securities. For example, a real estate investment trust (REIT) is a corporation or trust that uses investor funds to buy, rent and sell properties, and 90 percent of the profits are paid out to shareholders as dividends. Real estate mutual funds and real estate ETFs typically invest in REITs to provide broad market diversification.
In fact, only 14 percent of American families are directly invested in stocks, according to the Pew Research Center. That said, just over half (52 percent) do have some sort of investments in the stock market, most of which are retirement accounts like 401(k)s.
Real estate properties are often identified as either good investments or bad ones based on a gamut of factors like rent prices, property taxes, neighborhood vibes, the local job market, school accessibility, future development plans or lack thereof, natural disasters like flood zones, and more. But putting your money in ETFs and mutual funds can help you to diversify your portfolio to mitigate the risks involved. 041b061a72