Investing in Basic Rental Properties
Basic rental is an old practice. You buy a piece of property and rent it out to someone else, whether it is a house, a condo, a townhouse, etc. You, as the owner of the property, pay the mortgage, taxes and cost of maintaining the property.
To invest, this means you need to make a profit. You can charge rent that just covers all the costs involved, and later when the property appreciates, sell it for a profit. This way, you pay little to nothing to keep the property until it appreciates to a good value. (According to the U.S. Census Bureau, real estate has consistently increased in value since 1940).
You may also charge more than the costs in order to produce a monthly profit. But the most common investment strategy is to only charge enough rent to cover expenses until the mortgage has been paid, at which time the majority of the rent becomes profit.
There are, of course, blemishes on the face of what seems like an ideal investment. You can end up with a bad tenant who damages the property or, worse still, end up having no tenant at all. This leaves you with a negative monthly cash flow, meaning that you might have to scramble to cover your mortgage payments. There is also the matter of finding the right property – you will want to pick an area where vacancy rates are low (due to demand) and choose a place that people will want to rent.
Perhaps the biggest difference between a rental property and other investments is the amount of time and work you have to devote to maintaining your investment. When you buy a stock it simply sits in your brokerage account and (hopefully) increases in value. If you invest in a rental property there are many responsibilities that come along with being a landlord. When the furnace stops working in the middle of the night, it’s you who gets the phone call. If you don’t mind handyman work, this may not bother you; otherwise, a professional property manager would be glad to take the problem off your hands – for a price, of course.
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