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

Georgeta Olaru / 500px

with drop in stocks i rise in inflationyou might be wondering if buying a rental property is a good place to park your money.

It sounds simple enough: buy a house, rent it out at a price to cover the mortgage, and put one up constant cash in your pocket – all while the property value increases. Month, rents go up across the US

But there is much to consider, from increase in mortgage interest rates in local markets to find reliable tenants. There may also be surprise expenses. Here are some answers to common questions about buying a rental property:

Is a rental property worth owning?

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

If you can charge even a few hundred dollars a month after all expenses including taxes (income and property) are paid off and you’ve 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 gives you the opportunity to buy more of the same type of asset – buy more real estate – or buy other types of assets when [real estate] it’s disadvantaged,” says Cynthia Meyer, a certified financial planner (CFP) at Real Life Planning in Gladstone, New Jersey, who works with real estate investors.

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

Are rental properties a good investment right now?

If you have your financial house in order, especially as interest rates rise, rental properties can be a good long-term investment, says Meyer.

A rental property should generate monthly income, even if it’s just 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’ve been asking people a lot is ‘does the deal make financial sense?’ Don’t show me something that’s like losing $300 a month and expect me to tell you it’s a good idea because it probably isn’t,” says Meyer. “At the very least, there should be no net cost to the property.”

Is owning a rental property a lot of work?

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

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

As an investment, a rental property can be a slower but more reliable source of income than flipping a house at the height of a booming housing market. Although home values ​​have skyrocketed in the past two years, that frantic pace is slowing.

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

How much profit should you make on a rental property?

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

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

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

What type of loan do you get for an investment property?

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

According to experts, most lenders require 25% down for a rental property mortgage. This contrasts with the 6% to 7% that homeowners have been paying in recent years.

Lenders consider a rental property mortgage 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 for all cash and still have funds left over for a buffer, that’s ideal. Keep in mind that real estate is considered an “illiquid” asset, one that you can’t quickly turn into cash in your pocket. Most real estate investors require or want a mortgage.

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

What credit score is needed for an investment property?

Lenders usually offer the best rates to borrowers credit scores of 760 or higher.

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

What percentage can be borrowed 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 getting harder, he says Meyer. Lenders want assurances that the mortgage will be paid in tough times and that they will take a close look at your property before granting a second loan.

Buyers of rental properties “need to be even more careful with their numbers and their interest rate assumptions,” Meyer noted. “Because they won’t be able to refinance and take equity out and have that property still be cash flow positive if rates are double what they were a year and a half ago.”

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