Investing in a rental property is where an owner buys a property with the goal of leasing that property to a tenant on a month to month basis. There are many reasons why rental properties are considered one of the best investments that can be made. As with all investments it is important to understand your exit strategy when investing so that you know how to best get out of the investment when the time is right. The three benefits this article with discuss are rental income, appreciation and long term equity growth.
When you purchase a home with the intention of leasing it out to a tenant you start generating rental income. Rental income is the money that the tenant pays you on a month to month basis. Some investors simply cover their costs and rely on appreciation and long term equity growth to make their money but rental income can generate great monthly income if done correctly. If you have the cash buying an investment property all cash can immediately start paying you back because that first month rent, less expenses, goes into your pocket and you now have income. If you don't have the cash to buy all cash try to ensure that going rent in the area will cover, and hopefully generate positive cashflow, your monthly mortgage rate. If your net return per month is $0 you're still making money but the more positive cash flow you can make the better.
Real estate is similar to the stock market. The prices rise and fall depending on demand. We saw a huge market correction in 2007 when real estate values plummeted created a significant dip in home values. We cannot guarantee that those dips don't happen but historically real estate appreciates almost every year, in fact over the past 5 years real estate in Illinois appreciated at over 5% per year. A good rational thought is that real estate will typically appreciate at about 1% per year on average. With a renter in your property at least covering the mortgage you can typically expect that your place will increase in sales value each year meaning when you go to sell your property should be worth more than your bought it for.
Long Term Equity Growth
Every month when you pay your mortgage your are paying a portion of that money towards the equity, or your ownership, of the property. Each month that you make your payment the amount of interest you pay decreases and the amount of equity you gain increases. If you have a renter who is just covering your mortgage costs you are still gaining money on the backend. The longer you hold on to that property the more equity you have the more cash you get when you sell. Couple this with the fact that real estate appreciates at about 1% per year means rental properties can be hugely beneficial.
One thing to make sure of is that you don't invest too much into rental properties. All good investors need to have liquid cash that they can use to cover and unforeseen expenses. Don't put all your money in one basket. If you can buy a place in which all three of the above criteria happen you will have found a great investment. Make sure to take your time, ask your REALTOR and mortgage broker for advice and make the right choice.