When you invest in rental property, you may be able to increase your earning potential and generate positive cash flow for yourself.
Buying a rental property can be a great investment at any age. In doing so, you can receive regular payments that act as an additional form of income on top of your day job. In fact, you can also do short-term rentals or partial rentals out of your primary residence.
As a rental property owner, you have various rental options that allow you to earn money to use toward your mortgage payments (and more). Here’s what you should know about owning and renting out a rental property.
How On-Demand Hospitality Platforms Are Changing The Landscape Of Traditional Property Investing
While traditional renting typically entails finding a tenant to rent your property for longer, more-permanent stays (such as yearly leases), on-demand hospitality platforms allow people the flexibility to rent their properties at their own leisure. For instance, many rental owners will offer one-night or weekly bookings, or even monthly stays.
Benefits Of Owning A Rental Property
There are many benefits of owning a rental property as an investment, according to SF Gate. Here are three major pros to consider:
- Tax Benefits
Owning a rental property provides great tax benefits depending on your state. For instance, property investors pay little to no taxes on their rental property income, as only the portion of your rental income that exceeds the mortgage and property tax payments is taxed. They also tend to get deductions, such as mortgage interest and insurance, when filing for taxes.
- Positive Cash Flow
Renting out your property will ensure a positive and consistent cash flow each month — without you even having to go to work. This is a great source of income you can rely on regularly, which can contribute to your financial security or simply allow you extra cash in the bank. Keep in mind, the more tenants you have, the higher the cash flow — so if purchasing an entire apartment building is in the cards for you, it will be better for your finances.
- Value Appreciation
Over time, your property’s value appreciates, meaning you will earn more to put toward your mortgage. Additionally, you’ll be able to sell your property at a higher price than when you purchased it, especially since property values have been increasing as of late. Best of all, if your property’s value increases significantly, you may be able to refinance your mortgage to a higher amount to match the property value and withdraw the difference between your current mortgage amount and new (known as a cash-out refinance).
Cons Of Owning A Rental Property
While there are many attractive benefits of owning a rental property, there are also some important cons to keep in mind:
- Difficult Tenants
Dealing with difficult tenants can be a real headache for property owners. But if you take the time to conduct thorough background checks, check references and meet with the renter in person before having them sign a lease, you shouldn’t run into too many problems.
- Challenges Of Being A Landlord
Being a landlord can often feel like being a boss. There’s stress and responsibility that falls onto your shoulders. Additionally, when quick repairs are needed or other issues arise with your property, it’s your job to hire a professional and cover the expenses.
- Potential For Neighborhood Depreciation Or Unfavorable Tax Changes
Just as property value can appreciate over time, it can also depreciate due to neighborhood changes. Additionally, property taxes and insurance premiums can spike.
Features Of A Great Rental Property
Looking to purchase and rent out a property? Here are some key features of a profitable investment property to consider:
- Average rents — When deciding on the right rent to charge for your property, you’ll want to conduct some research on the average rent in the area. Charging too much will deter potential renters, while charging too little can leave you with barely enough money to cover your mortgage and other payments. Additionally, you’ll want to account for potential changes such as tax increases or spikes in insurance premiums.
- Number of listings — Depending on the number of listings in your area, you will either need to raise or lower your rent to accommodate it. For instance, if there are many vacancies in the neighborhood, you’ll have to decrease your rent to stay competitive; while if there are few to no vacancies, you might get away with increasing your rent and earning more than anticipated.
- Future development — Check with your local municipal department so you can anticipate new development plans. This will help you determine whether you’ll be up against new properties or additional housing.
- Natural disasters — If you’re renting a property in an area that experiences frequent natural disasters such as earthquakes, flooding or even tornadoes, be sure to account for insurance, which you’ll need to subtract from your returns.
- Property taxes — It’s important to know how high your property taxes will be, as they vary widely. You can check your municipality’s assessment office for tax information or simply talk to other homeowners in your neighborhood. High property taxes might mean you’ll have to charge an unrealistic amount in rent, so be sure the town in which you’re looking to purchase a rental property is not in financial distress.
- Schools — Depending on the size of the property you’re looking to rent, you’ll want to consider the quality of local schools, particularly if you own a family-size home. If you purchase a home in an area without good schools, your investment won’t be nearly as valuable.
- Neighborhood — The neighborhood in which you buy your rental property will greatly impact the renters you attract. For example, if you’re renting a home in a college town, odds are your tenants will be students; but if you’re renting out a nice condo in a small community, you might find tenants who are looking to settle down.
- Amenities — Local amenities such as parks, restaurants, public transportation, downtowns and more can increase the value of your home. This will attract more renters to your property, thus allowing you to increase your rent.