If you already have a steadily growing investment portfolio of stocks, bonds and mutual funds, then perhaps it’s time to add a new type of investment to your collection: rental property. Investing in rental properties can be an immensely rewarding venture, but it demands a lot of planning and financial involvement to be successful.
Buying Your First Rental Property
Are you ready for investing and buying your first rental property? Here are some things to consider while making your decision:
What’s Your Current Financial Situation?
To get an accurate depiction of your current financial situation, you’ll need to calculate your personal net worth. This involves assessing your debts, income, and other investments. Also take a look at the interest rates you’re paying and receiving. If you are earning quite a bit more on your investments than you are are paying on your loans, then why rush to pay off debt when you could invest that money elsewhere for greater returns?
Obviously there is an element of risk here, your rates of return aren’t guaranteed, so that is something to consider. But, all too often, people assume that having debt means you’re not ready to invest. On the contrary, you should always be looking for new ways to make your money work for you. Which is why saving up for a rental property might be an ideal option, even if you’re not totally debt-free yet.
Do You Have Time to Manage a Rental Property?
Rental properties aren’t just monetary investments; they also require ongoing maintenance, contact with tenants and repair companies, and other time-sucking tasks that all homeowners deal with. If you live out of state, you’ll likely have to pay a management company to deal with tenant issues. If you live locally, you’ll be in charge of managing tenant complaints, finding new renters each time someone moves out, and scheduling repairs. Since owning a rental property takes a lot of money and time, it’s important to ask yourself beforehand if you have enough time to make this investment dream a reality
Hurdles to Investing in Property
Can you invest in property while paying off student loans? What if you’re still renting your own primary residence? While these two scenarios may seem detrimental to any investment plan that involves purchasing an investment property, it’s still worth looking into property investments because the pay-off could be enormous down the road if you get in a budding housing market earlier on.
For student loan debt or other debts you currently have, simply compare those interest rates and payoff projections with the historical and future projections for the housing market you’re considering investing in. If you can cover your current payments on student loans while funneling most of your leftover income into a savings account for a down payment, you can minimize your risk of default while reaping the rewards of rental property investments. Don’t forget that student loan interest is also tax-deductible and paying off a student loan could lead to a temporary drop in your credit score, as nonsensical as that sounds. So investing in rental property while paying off student loans could be a financially rewarding option.
Also, your primary residence, is actually a liability. When you own your home you are responsible for the mortgage payment, maintenance, and taxes. So if you’re still renting your place of residence, a financially smarter move might be purchasing a rental property to build up the assets in your portfolio before taking on the massive expenses involved in owning your own home. When you rent out the house you have rental income to pay the expenses. Not so when you live in the home yourself.
Unless you’re financially secure in nearly every aspect of your life, the decision to invest in a rental property won’t be as simple as “sure, why not?” Instead, you’ll need to assess your whole financial situation. You should determine how much time and money you’re already devoting to other obligations, and research the housing market you’re interested in. This will help you decide if the potential gains outweigh the risks of prolonging your debt repayment and possibly holding off on purchasing a home for yourself.
Are you ready for investing and buying your first rental property? What’s holding you back?