Property is one of the oldest forms of wealth. Many people build up a nest egg by purchasing a home of their own. Owning a home is one way to build equity and savings. For many people who are thinking about investing in real estate today, the most important is just how it might work to their financial advantage. Rental property has both pluses and some drawbacks. For the right person, owning rental property can generate ongoing income and increase their net worth with little effort. It can also be a frustrating money pit. Anyone who is thinking about this process should take the time they need to consider their immediate goals as well as their fiscal plans as they look five years into the future and even into retirement.
Understanding the Rental Market
The rental market has much in common with other forms of real estate. Renters, like owners, want a nice place to live at a price they can afford. At the same time, many renters may have lives that are in flux. Someone might be attending college or biding their time until they have a family and move into a home of their own. Anyone who is thinking about buying rental property should be aware of the different terminology they are likely to encounter as landlords.
For example, the rental lease may be a month-to-month lease. In that case, either the landlord or the tenant can break the lease without consequences as long as they give at least thirty day’s notice. Another type of lease is what is known as a fixed-term lease. Under the terms of this agreement, the renter agrees to pay rent for a fixed term such as a year. If the tenant breaks the lease, they may have to forfeit their deposit.
Another major consideration is how much working capital the investor has on hand. When people purchase a single family home or apartment of their own, they are typically asked to put down a sum of money. Investing in real estate as a landlord usually means investing more money than the standard twenty percent down payment on a single family home. When people invest in a single family home of their own, they also have more freedom to decide what to do with it. A homeowner may postpone minor repairs such as fixing the garage roof until they have enough funds. Renters have and expect repairs to be made immediately when something goes wrong even if it’s in the middle of the night.
The Real Estate Investment Trust
Certain real estate investors purchase rental property on their own and then fix it up for the rental market. This is a good strategy that can yield an impressive rate of return on capital. In the last few years, another form of real estate investment has arisen. This is known as the Real Estate Investment or REIT. The REIT is very much like investing in rental properties as a form of stock. It’s one way to round out an investment portfolio. The manager of the trust acts like the landlord’s assistant by making sure the property is in good shape. While many REITs focus on all forms of real estate, certain REITs are solely invested in residential properties.
For those who’ve never invested in any form of residential real estate before, it’s best to start off slowly. Think about purchasing a two family home or small apartment. Doing so allows the investor to gain an overall feel for the market. An investor may discover they have a knack for sprucing up old homes, finding the best tenants and creating an impressive secondary or even primary income flow. Or they might realize there are far better uses for their hard earned savings.
All investors should carefully consider their options before making this kind of large financial commitment.