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

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With stocks falling and inflation rising, you may be wondering if buying rental properties is a good place to park your money.

It seems simple enough: buy a house, rent it out at a price to cover the mortgage, and put some fixed cash in your pocket – while the property’s value rises. In addition, rents in the US are rising

But there’s a lot involved, from rising mortgage rates to local markets to finding reliable tenants. There may also be surprise costs. Here are some answers to frequently asked questions about buying rental properties:

Invest in high-yield, professionally managed real estate with EquityMultiple Is it worth owning a rental property?

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

If you’re able to take out even a few hundred dollars a month once all expenses, including taxes (income and real estate) have been paid, and you’ve contributed to an emergency reserve fund, a rental home can provide a reliable return after a few months. while. “Assuming the real estate is profitable, coming in that cash flow gives you the opportunity to either buy more of the same type of asset — buy more real estate — or buy other types of assets when [real estate] is out of favor,” said Cynthia Meyer, a certified financial planner (CFP) at Real Life Planning in Gladstone, New Jersey, who works with real estate investors.

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Are rental properties a good investment right now?

Keeping your finances in order, especially when interest rates are rising, rental properties can be a good long-term investment, Meyer says.

A rental property should generate monthly income, even if it is only a few dollars at the beginning. 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 asked people a lot is ‘does the deal make financial sense?’ For example, don’t show me anything that loses $300 a month and expect me to tell you it’s a good idea because it probably isn’t,” Meyer says. “At the very least, there shouldn’t be any net costs for the property. Is running a rental home a lot of work?

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

Some rental property owners hire management firms to look after the property, with fees typically ranging between 8% and 12% of the monthly rent collected.

As an investment, a rental home can be a slower — but reliable — source of income than a home at the peak of a booming real estate market. While house prices have risen over the past two years, that frenetic pace is slowing down.

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How much profit should you make on a rental property?

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

For example, a net profit of $100 per month (after everything is paid for) can add up. If rents typically rise 3% to 5% per year, your profits should also increase.

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

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

Owners of rental properties can apply for mortgages just like homeowners, but with very important differences. First, the deposit is usually much larger.

Most lenders require about 25% off a mortgage for a rental home, experts say. That contrasts with the 6% to 7% that homeowners have paid in recent years.

Lenders consider a mortgage for a rental home to be more risky than a regular mortgage, because an investor’s home loan is likely to take precedence in difficult times.

What is the best way to finance an investment property?

Of course, if you can buy a property for all cash and still have money 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 ask for or want a mortgage.

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Before you sign up, 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 tend to give the best rates to borrowers with a credit score of 760 or higher.

“Can you get a real estate loan if your score was 680 or 700? Probably, but you’d just pay more interest,” Meyer says.

What percentage can you borrow on a rental property?

It depends. In 2022, as interest rates rise, the strategy of buying a dilapidated property, refurbishing it, increasing the rent, and then borrowing against that property to buy another property becomes more difficult, Meyer says. Lenders want assurance that the mortgage will be paid in difficult times and will scrutinize your property before granting a second loan.

Rental home buyers “need to be even more careful with their numbers and their assumptions about interest rates,” Meyer noted. “Because they won’t be able to refinance and take equity and real estate will still have positive cash flow if interest rates are twice what they were a year and a half ago.”

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