Even in a strong seller’s market like the one in early 2021, many people who want additional streams of income besides a day job consider real estate. With many people who are interested in renting homes, buying a rental property or two can feel like a great way to diversify and build wealth.
At the same time, people who jump into the investment property world without a lot of background can be dismayed at some of the normal facts of the business. To avoid jumping in without understanding, recognize these pros and cons of investing in real estate.
Pro: Housing is a constant need, creating steady long-term returns.
The availability of real estate investing is a true positive of this option: while there are many esoteric or less straightforward forms of investment, starting a real estate investment business with just one property is possible and, if you play your cards right, can also be profitable.
Con: You’ll need strong insight into the rental market to keep your low vacancy rate.
Rental markets don’t work exactly like owner-occupant homebuyer markets, with different things being prized in each kind of home. Rather than just buying a property that is exactly like a home you own and enjoy, talk to a top real estate agent about what areas are popular among renters, what features they care about, and more.
If you choose to purchase a fixer-upper and DIY the renovations, make sure you still get plenty of insight into what kinds of features a renter would like, since the design of the home should be optimized for a rental audience.
Pro: Using rental income to pay down a mortgage builds equity you can use later.
While you may need to come up with a large down payment for a home you won’t be owner-occupying, after that payment you should be able to set the rent at a level higher than the mortgage payment. This allows you to build equity in the property without risking your own savings every single month. Especially for small rental homes, this can be an affordable path to more income streams.
Con: Maintenance, management fees, and advertising all cost money as well.
That being said, you’ll still want some cash to work with. Your rental rate needs to leave you with the cash flow to pay for or do maintenance and advertising for new tenants. If you opt to have a management service handle your rental, you’ll need to account for their fees in your calculation of what it takes to keep the rental afloat. Recognize that some homes will have more upkeep needed than others. Buying a move-in-ready rental is one way to take some of the guesswork out of your first rental property, though even that isn’t a firm guarantee of low maintenance bills.
Pro: Owning rental properties gives you options when strong sellers’ markets emerge.
Lately, rental property owners who recognize that a blazing hot seller’s market is in progress have the option to sell a home without having to immediately buy another one, cashing in on the excellent market without the challenge of finding a new home to live in because of it. Remember that your rental property itself is both income over time and a chance to ‘cash out’ and use that same money elsewhere. You have many options when you own a rental home.