One of the best ways to secure your financial future is to purchase an investment property, also known as a rental property. While buying your first rental property might be the easy part, becoming a landlord is often the daunting aspect of any property investment.
Even so, it has been proven that there is no quicker way to true wealth and no surer way of making sure you reach your financial goals than with an investment property. But you know that already.
What you want are the specific pros and cons associated with an investment property. In this article, we will go over the pros and cons of buying property as an investment. As a result, you will have some insight into whether or not an investment property is right for you.
The Pros Of An Investment Property
Below we review five reasons benefits of purchasing a rental property for investment purposes.
1. Earning Steady And Consistent Rental Income
The biggest benefit is the promise of earning a steady and consistent rental income from your investment property.
As rent is a fixed amount, you will receive that amount, less expenses every month. In comparison, it is hard to find stock investments that perform that regularly and give you so much control over the outcome of the investment.
Having this reliable source of income lets you pay down debt, top up your savings, or even fund your own retirement fund. The reliability of rental income is what makes it so popular with many investors.
This is because the rules behind the premise are simple. Furthermore, buying your first rental property can often seem less intimidating than putting your savings into the stock market.
If you want an investment that generates reliable returns over time, you really can’t beat a property investment.
2. The Interest On Investment Property Loans Is Tax-Deductible
There are some pretty serious tax advantages to becoming a landlord and property investor.
For one, there are tax deductions for mortgage payments on rental properties. Aside from retirement accounts and certain specific instruments, most stock investments don’t have the most aggressive tax incentives.
Rental property, however, can have incentives for taxes and even incentives in terms of taking out a loan or refinancing it.
These should be considered during the financial planning stages for the rental property investment.
3. Property Investment Is More Stable Over Time
The ups-and-downs of the stock market are too much for many people to handle.
To combat this, property investment might be a more stable and comforting investment over the long term. This is because property values often track along a certain and very boring path.
It is usually upward and sometimes it is quite slow.
Even if you are just going by inflation, a home will rise in value over time compared to most other items. This is because there is a constant market demand for the services and luxuries offered by a home.
An investment in a technology company might be all the buzz right now, but maybe not so much in a year or two as new technologies emerge.
However, it is unlikely that your home’s value will be destroyed by a disruptive market force.
4. You Grow The Value Of Your Investment With The Rise In Property Values
Rising rents aren’t the only way you can increase the money you make from a rental property. In most cases, you can also count on a rise in the value of your property over time.
This actually puts money into your pocket whenever you decide to finally sell the property.
For example, say you buy a property at $100,000, and it goes up to $175,000. When you sell it ten years later, you get all of the rental income over that time as well as the increase in the value of the property.
That’s a two-for-one deal that is hard to match and one that makes many real estate investors quite rich.
With that being said, it does take knowledge and expertise to purchase properties in areas that will appreciate in value. By no means is it a guarantee that properties will increase in value, and that is something you should keep in mind when doing your research.
Also, the amount of time you plan on holding the property will factor heavily into whether or not sharp rises in value matter to your bottom line or not.
5. A Rental Property Is A Physical Investment
Another huge advantage that a property investment has over stocks is that a property is a physical asset. Furthermore, when you invest in a rental unit, it has known purposes and benefits which are easily understood and witnessed.
You are not investing in a company’s future potential or recent performance, you are investing in a place for someone to live.
The ability to connect a rental property and its purpose to something in the real world makes it easier to understand from multiple standpoints for many people.
The goals of property investments and stock market investments, in general, are much the same.
However, getting an individual comfortable with how they participate in the market often determines how much success they will have. In that case, property investments work better and make more sense for some investors, maybe yourself included.
The Cons Of A Rental Property
While there are many upsides to investing in a rental property, there are some downsides that you should take into consideration before purchasing an investment property.
Below, we review five common complaints you will hear from existing landlords.
1. Interest Rate Rises Can Impact How Much You Make
Another major factor to consider when thinking about purchasing a rental property is that interest rate rises can devastate your bottom line.
This applies to how much money you make now as well as in the future. Therefore, it is so important that you pay off any loans associated with your rental properties as soon as possible.
The longer you make interest payments the more money you take away from your potential profit. Furthermore, this aspect is often out of your own control.
You cannot predict nor control interest rate rises and you are somewhat at their mercy.
Similarly to the stock market, there are things outside of your immediate power that could very much materially impact your investment outcome.
2. Rental Income May Not Cover Mortgage Repayments
One of the biggest caveats about investing in rental property is that you might not be able to get a sufficient amount of rent to cover mortgage payments, at least in the beginning.
Over time, you might be able to position your rental property better in the market. But if not, you will need to prepare to top-up the rental income you receive so it is enough to cover your mortgage payments.
At least until you can get your loans down to a reasonable level. A level where the money you take in from rent is greater than the money you pay out for the property every month.
Just like a stock investment, the returns come over time and are not immediate. Furthermore, similarly to the stock market, your money is being used to subsidize the growth of some kind of investment.
In this case, it is building an ownership stake in your mortgaged rental property.
3. There Are High Entry And Exit Costs
Another downside to a rental property is the high cost of buying and selling a house.
When you decide to part with your investment property, you will end up spending a lot of money to make that happen. Exit costs can include your realtor fees, closing costs, the money you spend to clean, fix or stage your investment property.
As a result, this eats into any profit you have made. You will have to pay attention to the bottom line to make sure that you come out on top.
When considering an investment in the stock market, entry and exit fees are typically quite small in comparison. Usually, you pay a set fee for each trade, regardless of the quantity, or a small fee per share that you buy or sell.
4. You Are Required To Cover Costs Without Tenants
One of the worst situations for a landlord is to not have tenants in their rental property. You may have to prepare to cover the full costs of your rental unit for the times that you do not have any tenants living in it.
Unless you have the income to support two houses, this might be too much for you to take on as an individual.
Most potential property investors look at the mortgage and the repayment amount. However, you might not consider the situation where you don’t have someone living in your rental unit for months on end.
5. Relatively Illiquid Investment
Another downside to property investments is that they are relatively illiquid when compared to stocks and savings.
You normally cannot sell off a portion of your home for some quick cash for an emergency or to fund another investment.
With that being said, there are options for you to refinance or take out another mortgage. However, both of these are expensive options and time-consuming. Not ideal for situations in which you just need some money to cover a quick expense.
This aspect boils down to cash management and discipline.
If you know you are bad at managing money then homeownership and rental properties may present novel challenges for you. These challenges could erase any gains, at least in the beginning.
The realization that there are 86,400 seconds each day. What are you doing today, so that tomorrow you are a step closer to where you want to be? If not now, then when?
eightysixfourhundred, make them count
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