Find out if a rental property makes sense for you.
When it comes to real estate investing, there are several ways to make money, but none of them are exactly easy. So if you’re looking for a passive income source, owning a vacation rental might be just what you’re looking for.
If you want a healthy chunk of passive income, then you need to invest aggressively. Buy a property that will provide a lot of month-to-month income and you’ll be able to sustain these profits over the long haul.
The more rentals you own, the more cash flow you can produce. If you’re looking to buy just one property, make it one that brings in big bucks.
If you’re a real estate investor with just one rental property, you probably won’t get rich.
But if you can grow your business from just one rental to several, then you can increase your wealth substantially.
The more rentals you have, the more you make in a year. So if you can grow this portfolio to 5-10 properties, you can start seeing some pretty healthy numbers.
How to calculate rental income:
To estimate your rental income, you’ll need to analyze your deal very closely. Here are some of the relevant factors to look for.
Choosing a Rental Property
There are two basic ways to approach real estate investment.
You can buy an investment property to live in yourself : You benefit from the tax breaks (deducting expenses for your mortgage, your maintenance, and the like). However, eventually you may be forced to sell the property to make use of it.
You benefit from the tax breaks (deducting expenses for your mortgage, your maintenance, and the like). However, eventually you may be forced to sell the property to make use of it. You can buy a rental property to let for rents : You can benefit from the tax breaks for your mortgage interest, property tax, and maintenance expenses. However, you have to stay involved in the property, and you benefit only from the rents, minus your expenses and your mortgage interest.
You can benefit from the tax breaks for your mortgage interest, property tax, and maintenance expenses. However, you have to stay involved in the property, and you benefit only from the rents, minus your expenses and your mortgage interest.
You may ask, what’s the difference between buying a rental and buying another property to live in? This is where many people get it wrong.
Yield Is Better Than Location
If you’re looking for a real estate investment, a rental property can be a great choice. But with performance continually improving, people sometimes overlook the important things about location and yield and end up in situations where the location isn’t so hot, or worse, there’s not a market in which to rent.
The largest element overlooked is location.
While this element may seem obvious, it’s not. Location matters. Location matters a lot. Yet it is overlooked and misunderstood time and time again.
Location is what provides you and your tenants with peace of mind. In some markets with high vacancy rates, this may not be a problem. But in most markets, steady, dependable, and quality tenants are in high demand. Without good tenants, you will never have a cash flow. Of course, it’s also important to have the ability to manage the property.
What Is Net Rental Yield?
Rental property is a vehicle for investing in real estate, so if you want to figure out if you can make a good profit investing in rentals, you need to know how much money rent will cover your expenses. Net rental yield is simple: it’s the number you’re left with after you subtract your annual operating expenses from your expected annual gross rent.
Operating expenses are costs that you can control. Knowing your costs is the key to calculating your net rental yield. Some common operating expenses are:
Maintenance-repair (not including occasional repairs like tile repairs, new appliances, etc.)
Taxes (property, city, school, etc.)
Insurance (it helps you sleep better to have extra insurance, in case something catastrophic happens).
Your expenses will vary, depending on the type of tenant you have, how many units you have, your region, and how well you’ve managed to keep your properties. There’s no point in calculating your net rental yield with sloppy property management.
Avoid Rookie Mistakes
- Rule 1: Pick a durable, hard-to-crack property
- Rule 2: Research similar properties in your area
- Rule 3: Set a reasonable rental price
- Rule 4: Don’t completely empty the bank
- Rule 5: Stick with local clients
Renting out properties to tenants has long been a popular side business. Some individuals have made a fortune as landlords, while others have had to make frequent fixes to uncooperative properties. No matter which side of the coin you land on, it doesn’t hurt to learn from other people’s mistakes. The keys to both success and troubleshooting are simple: determine your strengths and weaknesses, use common sense, and get a plan in place before you dive in.
What About Appreciation?
The story changed somewhat when we looked at appreciation in the areas around Boulder. Most experts believe that property in areas with high job growth will increase in value, due to the demand for housing. However, this wasn’t exactly what we saw. “If you’re buying a home to live in, you don’t have to worry about this,” Laursen says. “Buy there to reside in, not to make money.” In the Boulder area, appreciation topped out at 7.7 percent, and no area saw any appreciation over 10 percent. The home that Amy and I bought, for example, appreciated by a conservative 3 percent in the past year.
Despite the low rates of appreciation in the areas of the country where we live, the investment still seemed attractive to us. It turns out we made a good decision.
Rental Tax Advantages
Rental income is often less taxable than passive income from selling physical items or tangible intellectual property … or even your own labor. Being able to depreciate the purchase price of your rental property can drastically lower the tax you’d otherwise owe.
In addition to its higher level of tax sheltering, real estate investment has lower vacancy rates than traditional rental properties. You can purchase a property with the knowledge that it will likely be rented for years to come, rather than be empty for extended periods of time.
Buying a Rental Property is Just the Beginning
Rental properties can be a great source of income, but they also take a significant amount of time to maintain and update. Ideally, you want a property that you can comfortably rent to someone who’s reliable and will take care of the property. That’s not always possible, but here are some tips to help you make the most of every rental property.
Solve Common Problems
To a lot of people, renting a property means finding an immaculate house that needs nothing but a tenant’s name on the lease. If you can find that sort of property, by all means, rent it. But don’t let your standards fall too low.
If there are substantial repairs needed to make the property livable, they need to be made. Down the road, the repairs will come out of your pocket and will probably eat into your rental income. From these repairs, you’re better off getting them done upfront.
Another common problem is finding a tenant who’s reliable and will pay on time. Some tenants will promise the world just to get their hands on a good property.