Housing is key: Renting is not only a more affordable housing option but also an investment that can help you build equity, as long as you know what you’re doing.
Renting can be an excellent way to build financial stability in the short and long term. A properly managed rental property may be an effective way for anyone to invest their money and build equity over time. However, any investment requires careful planning and analysis before jumping in feet first.
Whether you have your eye on a new condo or a fixer-upper cottage, renting as an investment requires forethought and planning. Read on to learn more about investing in rental properties as a primary residence or secondary source of income in the long term.
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Using a Rental as an Investment: Housing is Key
In today’s housing market, renting is the new buying. Even though this is a time when homeownership has never been more affordable, many people are choosing to rent rather than buy. With renting becoming more popular and some rental properties offering incentives such as maintenance and management fees that are lower than a mortgage payment, many people see renting as an investment opportunity. But can you really make money by renting? Let’s take a closer look at whether using a rental as an investment makes sense for you…
What does investing in real estate mean?
Investing in real estate can take many forms, but they all have one thing in common: they all require a sizeable down payment. While you might consider investing in stocks or bonds with a small amount of capital, real estate investment is generally in the range of tens of thousands of dollars.
There are a few main ways to invest in real estate that you should be aware of:
– Buying a property: The most traditional form of real estate investment is simply buying a home or piece of land to live in and rent out the other units. While this is the most straightforward way to invest in real estate, it can have significant up-front costs depending on where you live – and you might even need a mortgage.
– Taking out a loan to acquire property: Another way to invest in real estate is to take out a loan to acquire an income-producing property. This is commonly done with commercial properties that generate higher rental income and therefore allow for a larger loan amount. Because real estate is often considered to be a safe investment, lenders often offer lower interest rates on real estate loans than other types of loans.
– Investing in a real estate fund: You can also choose to invest in a real estate fund that focuses on commercial properties. While this option is often reserved for larger investors, it allows you to diversify your real estate holdings by investing in a fund that has many different properties.
How to identify rental property opportunities
If you are thinking about investing in a rental property, the first step is to identify potential opportunities. There is no shortage of rental property listings in your local newspaper, on Craigslist, and on other online listing sites.
However, there are many factors to consider when evaluating potential rental properties.
Here are a few questions to ask yourself when you are deciding which rental property opportunities to pursue:
– Location: One of the most important factors to consider when evaluating rental property opportunities is location. You want to make sure you are investing in a rental property that has the demand for rental units in the area.
While it is sometimes possible to find rental properties outside of major cities or urban areas, they may need more frequent maintenance and may not offer the same long-term returns as those in major cities.
– Price: While you may be tempted to go for the rental property with the lowest price, you should consider the potential rental income and monthly expenses. Ideally, you want to find a rental property that has a low monthly expense and a high rental income.
– Cash flow: Another important metric to consider when evaluating rental property opportunities is cash flow.
Cash flow is a key metric for real estate investors that measures a property’s operating income (rental income for the property) versus its expenses (such as mortgage payments or property taxes). Ideally, you want to find a rental property that has a positive cash flow, or a larger amount of monthly income than expenses.
Before you invest in a rental property
Before you jump into investing in a rental property, make sure you are ready for the commitment. Beyond simply finding the right rental property, you also need to be prepared for the work involved in managing the property.
You will need to find tenants, handle the lease agreement, oversee maintenance, and follow all applicable laws and regulations.
Ready to take the plunge? Then it’s time to evaluate potential rental properties and determine what makes them good investments.
Beyond location and price, you also want to evaluate the potential rental property based on its cash flow.
You want a rental property that has a positive cash flow, or a larger amount of monthly income than expenses. Ideally, you want the rental income to exceed the amount you would spend on mortgage payments and other expenses.
A good rule of thumb is to make sure your monthly rental income is at least 25% or more of the total monthly expenses.
Understand your return on investment
Before you jump into real estate, it’s important to understand how to measure your return on investment. While there are a number of metrics to consider when evaluating a rental property, the most important is the net cash flow.
This metric measures the monthly income generated by the rental property minus the expenses associated with the property.
It is often expressed as a percentage of the total monthly rental payment. Ideally, you want a positive net cash flow, or a larger amount of monthly income from the rental property than expenses.
Beyond net cash flow, you also want to consider things such as appreciation and occupancy rates when evaluating a potential rental property.
Keep in mind that there is no guarantee that a rental property will appreciate in value over time.
In fact, certain types of real estate investments (such as commercial REITs) are generally more stable but may not provide the same level of growth as a residential rental property.
3 Ways You Can Actually Make Money by Renting
While many people think of renting as an expense rather than an investment, there are actually several ways you can make money by renting.
Let’s take a closer look at the three main ways you can actually make money by renting:
– Appreciation: The most obvious way you can make money by renting is by seeing a positive change in the value of the property over time. Many people like to invest in real estate for the chance to make a large profit if the property appreciates in value. While this can happen, it is not guaranteed and can take years to see a significant return on your investment.
– Cash flow: The best way to make money by renting is to focus on maximizing your monthly cash flow. You want to find the rental property with the highest rental income that also has the lowest expenses.
Ideally, your rental income should exceed the total monthly expenses by at least 25%. In other words, the rental income should be at least 25% more than the total monthly expenses (including your mortgage payment).
– Tax benefits: Another way you can make money by renting is by taking advantage of tax deductions and credits.
Depending on the type of rental property you own and your annual income, you could qualify for significant tax deductions and credits related to renting.
Some of the most common deductions include mortgage interest, property taxes, and maintenance costs.
How to make money by renting without owning a property
Whether you rent or own a home, you are likely paying a fair amount in monthly expenses.
But what if you could turn those monthly expenses into investment income?
You can, by using an investment property loan to secure a money advance against your monthly expenses. An investment property loan allows you to take out a single loan to cover your rent or mortgage payments on all of your rental properties.
This way, you can make money by renting without actually owning a property and paying the monthly expenses. You can use a single loan to secure money advances against your rental property expenses.
You can also use a single loan to secure money advances against your personal expenses, such as your car payment or student loan payment.
How does this work? Your loan provider will give you advance payments based on a percentage of the total monthly payment.
For example, if you have a car loan and you are making payments of $300 per month, you can get a money advance of $300 against that car loan using an investment property loan.
Summing up
Yes, you can make money by renting. The best way to make money by renting is to find the rental property with the highest rental income that also has the lowest expenses.
Beyond location and price, you also want to evaluate the potential rental property based on its cash flow. Ideally, the rental income should exceed the total monthly expenses by at least 25%.
Beyond location and price, you also want to evaluate the potential rental property based on its cash flow. You want a