Is a rental property a good investment? Everything you need to know

The real estate broker performs an analysis and makes a decision

Georgetta Olaru / 500px

with stock drop and rising inflationyou may be wondering if buying a rental property is a good place to park your money.

It seems simple enough: buy a home, rent it out at a price that covers the mortgage, and make some money stable money in your pocket – all while property values ​​rise. plus, rents are rising in USA

But there’s a lot to look at, from rising mortgage rates to local markets to find reliable tenants. There can also be surprise costs. Here are some answers to common questions about buying a rental property:

Is it worth it to own a rental property?

It can be – under the right circumstances, over time, and depending on your financial situation and goals.

If you are able to take even a few hundred dollars a month after covering all expenses including taxes (income and local Property) are paid and you’ve put into a reserve fund for emergency expenses, a rental property can provide a reliable return over time. “Assuming the property is profitable, having that cash flow offers you the opportunity to either buy more of the same type of asset – buy more real estate – or buy other types of assets when [real estate] is out of favor,” says Cynthia Meyer, a certified financial planner (CFP) with Real Life Planning in Gladstone, New Jersey, who works with real estate investors.

Are rental properties a good investment right now?

If you keep your financial house in order, especially when interest rates are rising, rental properties can be a good long-term investment, Meyer says.

The rental property should generate monthly income, even if it is only a few dollars initially. Do the math to make sure the property you’re considering is right for you. Consult a financial advisor or local real estate expert.

“One thing I’ve often asked people is, ‘does the deal make financial sense?’ Don’t show me something that’s losing $300 a month, for example, and expect me to tell you it’s a good idea, because it probably isn’t,” says Mayer. “At a minimum, there should be no net cost of ownership.”Is managing a rental property a lot of work?

Many things can go into setting up your rental property, including insurance, homeowner association fees, utilities, advertising, cleaning, repairs over time, upgrades mortgage payments and taxes are some critical factors to name a few.

Some rental property owners hire management companies to look after the property, with fees typically between 8% and 12% of the monthly rent collected.

As an investment, a rental property can be a slower – but reliable – source of income than flipping a home in the midst of a booming real estate market. Although home values ​​have soared over the past two years, that breakneck pace is slowing.

How much profit should you make on a rental property?

Once you’ve done the math, and if you intend to hold onto the property for several years, even a small profit “on the door” or a unit can be a valuable source of income over time, Meyer says.

For example, a net profit of $100 per month (after everything is paid) can be added. If rents typically go up 3% to 5% a year, your profit should go up too.

“After 20 years, that’s a pretty powerful rental return,” Meyer says. “And that doesn’t include the appreciation.”

What type of loan do you get for an investment property?

Owners of rental properties can apply mortgages as homeowners, but with very important differences. For one thing, the down payment is usually much larger.

Most lenders require about 25% down for a rent-to-own mortgage, experts say. This contrasts with the 6% to 7% paid by homeowners in recent years.

Lenders consider a rental property mortgage to be riskier than a conventional mortgage because the investor’s home loan is likely to take priority in tough times.

What is the best way to finance an investment property?

Of course, if you can buy a property for all the money and still have funds left over for a buffer, that’s ideal. Keep in mind that real estate is considered an “illiquid” asset—one that you can’t quickly turn into cash in your pocket. Most property investors require or want a mortgage.

Before you apply, make sure you’ve finalized your budget, researched how to attract tenants and have a clear idea of ​​the costs of running the property.

What credit rating is needed for an investment property?

Lenders tend to give the best interest rates to borrowers credit score of 760 or higher.

“Can you get an investment property loan if your score is 680 or 700? Probably, but you’d just pay more interest,” Meyer says.

What rate can you borrow on a rental property?

It depends. In 2022, as interest rates rise, the strategy of buying a run-down property, fixing it up, raising the rent, and then borrowing against that property to buy another becomes increasingly difficult, Meyer says. Lenders want guarantees that the mortgage will be paid in hard times and will scrutinize your property before making a second loan.

Buyers of rental properties “need to be even more careful about their numbers and their interest rate assumptions,” Meyer noted. “Because they’re not going to be able to refinance and pull equity and have that property still cash flow positive if interest rates are twice what they were a year and a half ago.”