Pros and Cons of Purchasing a Rental Property

September 23, 2021

Purchasing a rental property can provide a lucrative source of passive income. Purchasing a house is one of the most sought-after investment goals. A house is basically guaranteed to appreciate when maintained properly. Investors can expect to make a return of 8-10% on their investment in a house. This percentage outpaces inflation, providing a haven for retirement. 

Your possible income from purchasing a rental property will vary based on factors such as location, cap rate calculation, and the type of tenants you can locate. Before buying your first piece of rental property, one must consider the pros and cons of renting.

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Pros and cons to renting

Purchasing a rental property is a serious decision. The purchase of a house is representative of an investing mindset. In many locations, the average house currently costs more than $200,000 and will require a down payment of at least $5,000. With $5,000, one could open a futures brokerage account and begin saving today, or one could start investing in real estate for rental purposes. 

Purchasing a rental property comes with great benefits, and individuals who enjoy managing and coordinating projects will enjoy rental property management. Hands-on individuals may enjoy the idea of becoming a landlord. Paying a property manager is a viable option, but small rental property investors will benefit from handling repairs themselves. It will save them money in the long run. 

Getting your rental property winter-ready with Home Depot will prove to be challenging and rewarding at the same time. The opportunity to earn passive income lures many into rental management. On average, you can expect a  rental property with income-generating characteristics to provide a gross income between 8-12%. Investors can expect to make a profit of 50% of whatever your gross income is on your rental property. For example, if you calculated that a piece of property will net you $14,000 annually, you will make a profit of $7,000 annually or $583 monthly. Along with the possibility of passive income, purchasing a rental property also provides you with home equity. Your rental property's home equity is the current value of your home minus the amount still owed on your mortgage loan. Property owners can use their home equity to acquire a loan. 

Obviously, taking out a home equity loan puts your property at risk of being seized by a lender and should only be used for things that will make a positive return like renovations, business ventures, or furthering one's education. When an emergency happens, the low interest and tax-deductible options available with a home equity loan make it a viable loan option. 

While the pros to renting may sound appealing, there are multiple cons to renting as well. Picking a bad tenant is always a possibility. Following a basic screening procedure will reduce your chances of choosing a bad tenant. 

Checking for basic financial information such as a tenant's credit score, verifying income, and checking rental history, will help you choose the right tenant. Even if you choose the right tenant, your property could still face periods of vacancy. The housing market follows a positive trend on average, but unexpected events like interest rate hikes, natural disasters, or an addition of a piece of property like a cemetery could reduce your rental property's value. Unexpected costs increases like an increase in your mortgage payments due to increased mortgage rates could drastically reduce your profitability as well.

What to realistically expect

More Americans and Europeans are renting their houses than at any time before. There are 36.2% of households in America renting their houses out compared to 31.2% in 2006. The reason for the increase is obvious—renting provides a passive source of income and can diversify a portfolio. 

Before jumping into the renting market, investors must complete their own research. There are many factors you should consider before your purchase. For example, expensive homes tend to have a smaller profit margin than smaller, cheaper homes. To produce a satisfying return on your investment, you should outline your expectations and research potential cost and risk real estate property near your location.

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