August 12, 2022

As stocks take a dip and inflation rises, you might wonder if buying rental property is a good place to invest your money.  Seemingly, it’s easy: buy a property, rent it out at a high enough price to cover the payments and put a little extra cash in your pocket.  The goal being that while you do this, property values will increase as rental amounts continue to rise nationwide. While this may still be a great opportunity to the right investor, there are many factors to consider before moving forward with a rental property investment, from rising mortgage interest rates to finding reliable tenants. There can also often be unexpected expenses that pop up out of nowhere. Below is a list of some common questions about purchasing a rental property.

Are Rental Properties A Good Investment In Todays Market?

If you have your finances in order, especially as interest rates climb, rental properties can still be a good long-term investment.  A rental property should generate income monthly, even if it’s only a few dollars to begin with. You should do the math to make sure the property you’re considering is right for your current situation. Consulting a financial adviser or local real estate expert ahead of time is a smart decision that can save you a lot of money and headaches in the long run.

One of the most important aspects to consider is to simply ask, does the deal make financial sense? At a minimum, there should be no net carrying cost to the property. Managing a rental property can be a lot of work.  A lot can go into setting things up correctly, including purchasing insurance, HOA fees, utilities, advertising, cleaning, repairs over time, rising mortgage payments and taxes are some critical factors, to name just a few.  Some rental property owners hire management firms to take care of the property, with fees typically between 7-12% of the monthly rent collected.

As an investment, a rental property can be a slower but still more reliable source of income than flipping a home at the height of a thriving real estate market. Though home values soared in the past few years, that pace is beginning to slow.

How Much Return Should You Get?

Once you’ve crunched the numbers, and if you intend to hold the property for a number of years, even a small profit can be a valuable source of income over time.  For example, a $100 per month net profit (after everything is paid) can add up. If rents continue to rise at 3-5 percent per year, profit should continue to rise, also.  Overtime, that can add up to a pretty significant rental return which doesn’t include appreciation on top of monthly revenue.

What Kind Of Loan Should You Get?

Rental property owners can apply for mortgages like homeowners but with some noteworthy differences. First, the down payment for rental properties is usually significantly larger.  Most lenders require putting a quarter of the total down for a rental property mortgage compared to the average 6-7 percent required for homeowners in recent years.  Lenders view a rental property mortgage as riskier than a regular mortgage because in hard times a primary home will take precedence over all other investment properties.

What Are The Best Financing Options?

Ideally, if you are able to secure a property with all cash and still have funds leftover for a rainy day that is the perfect situation to be in financially. If you are going to take out even a small mortgage, most lenders will require documentation that you have more than enough reserves set aside to cover unexpected expenses.  Before you begin the application process, make sure you have a clear understanding of your budget, that you have researched how to get and maintain having happy tenants and also have a clear idea of all of the rental property management costs.

How Much Can You Borrow?

As interest rates rise in 2022, the strategy of purchasing a run-down property, fixing it up, raising the rent then borrowing against that property to buy another is getting more challenging. Lenders want guarantees the mortgage will be repaid even during difficult times and will comb over the property closely before agreeing to issue you a second loan.

Rental property investors must be even more careful about their budget and assumptions about what future interest rates will look like because they’re not going to be able to refinance to take out equity while maintaining a positive cash flow if rates are twice as high as they were just a year or two ago.