Investing in Real Estate

This is an investment as old as the practice of landownership. A person will buy a property and rent it out to a tenant. The owner, the landlord, is responsible for paying the mortgage, taxes and costs of maintaining the property. Ideally, the landlord charges enough rent to cover all of the aforementioned costs. A landlord may also charge more in order to produce a monthly profit, but the most common strategy is to be patient and only charge enough rent to cover expenses until the mortgage has been paid, at which time the majority of the rent becomes profit. Furthermore, the property may also have appreciated in value over the course of the mortgage, leaving the landlord with a more valuable asset.

Things to keep in mind

Your investing range will be limited by whether you intend to actively manage the property (be a landlord) or hire someone else to manage it. If you intend to actively manage, you should not get a property that’s too far away from where you live. If you are going to get a management company to look after it for you, your proximity to the property will be less of an issue.

Talk to renters as well as homeowners in the neighborhood. Renters will be far more honest about the negative aspects of the area because they have no investment in it. If you are set on a particular neighborhood, try to visit it at different times on different days of the week to see your future neighbors in action.

In general, the best investment property for beginners is a residential, single-family dwelling or a condominium. Condos are low maintenance because the condo association is there to help with many of the external repairs, leaving you to worry about the interior. Because condos are not truly independent living units, however, they tend to garner lower rents and appreciate more slowly than single-family homes.

Single-family homes tend to attract longer-term renters in the form of families and couples. The reason families, or two adults in a relationship, are generally better tenants than one person is because they are more likely to be financially stable and pay the rent regularly.

When you do find your ideal rental property, keep your expectations realistic and make sure that your own finances are in a healthy enough state that you can wait for the property to start producing cash flow rather than needing it desperately. Real estate investing doesn’t start with buying a rental property – it begins with creating the financial situation where you can buy a rental property.

Investing in a rental property

Key Advantages

YOU PAY LESS TAX

You can deduct certain expenses from your income – reducing the taxes you owe. The list includes:
  • mortgage interest
  • property taxes
  • insurance
  • maintenance/upgrades
  • property management
  • utility bills (if you include them in the rent).

YOU MAY BE ABLE TO DEDUCT LOSSES FOR TAX PURPOSES


If your expenses exceed your rental income, you may be able to deduct that loss from any other sources of income you have. This could reduce your total tax bill.

YOU GET A REGULAR MONTHLY INCOME


Other kinds of investments may pay out less often or income may be less predictable.

As a landlord, you can deduct certain property expenses from your income – reducing the taxes you owe. If your expenses exceed your rental income, you may be able to deduct that loss from any other sources of income you have.

Key Disadvantages

YOU TAKE ON THE RESPONSIBILITIES OF A LANDLORD

Rental units need repair – sometimes on an emergency basis. Dealing with tenants can be challenging, especially if they don’t pay their rent on time and cash flow is tight. If you hire a property manager to take care of these things for you, their salary is an added cost.

IT MAY BE DIFFICULT AND COSTLY TO SELL THE PROPERTY LATER

Real estate is not a liquid investment. That means it can take time to sell, depending on market conditions. It can also be costly to sell due to real estate and legal fees.

IT MAY BE DIFFICULT TO FINANCE THE PURCHASE


You must have a down payment of at least 20% when you buy a second property. You may need a mortgage. And, you will have high monthly expenses to cover when you own a building. Of course, you hope the income you receive from your tenants will cover this.

Top 10 features of a profitable rental property