Are Rental Properties a Good Investment? Five Reasons Why You Might Want to Buy a Second Property
The demand for rental properties is on the rise.
You’ve been considering growing your portfolio through real estate and are wondering if investing in rental property is a good way to build wealth.
Real estate can be complicated, and before taking the plunge, you want to understand exactly what comes along with this kind of investment.
Is rental property a good investment for you?
Learn more from the experts at PEGGY HOAG REAL ESTATE and HOAG PROPERTY MANAGEMENT.503.906.1370
Table of Contents
- Is Rental Property a Good Investment?
- 4 Reasons Rentals Are a Good Investment
- 5 Top Tips for Buying a Rental Property From the Experts at PEGGY HOAG
- When Shouldn’t You Buy a Rental Property?
- Contact PEGGY HOAG REAL ESTATE for All Your Rental Property Needs in Oregon or Washington
Is Rental Property a Good Investment?
Generally speaking, the answer is yes. A rental house is a good investment, depending on your goals.
Since the real estate market moves through cycles, purchasing and keeping a rental property as a long-term investment may be the best route for generating the highest return on your investment.
4 Reasons Rentals Are a Good Investment
As you are considering investing in a rental property, there are a few key factors that you will want to consider. Here are the top five reasons the experts at PEGGY HOAG REAL ESTATE, and HOAG PROPERTY MANAGEMENT believe owning rental property is a good investment.
#1: Monthly Cash Flow
Everyone loves a boost in their cash flow.
An increase in monthly income from a rental property is perhaps the number one reason many people decide to invest in real estate.
It’s important to remember, however, that although rental property can lead to a notable yearly income, a positive monthly cash flow can take time to materialize and is never guaranteed.
#2: Tax Benefits
Another great benefit of owning a rental property is the tax benefits. Talking with your CPA will give you all the details, but here is a brief overview:
The Internal Revenue Service (IRS) allows investment property owners several tax-deductible expenses, including write-offs for:
- Repairs and maintenance
- Leasing fees and property management
- Depreciation to reduce taxable net income
- 1031 exchanges to postpone paying capital gains taxes
- Mortgage interest
- Property taxes
- Owner deductions for things such as continuing education and travel expenses
#3: Property Value Appreciation
According to S&P CoreLogic Case-Shiller US National Home Price Index, the price of homes in the U.S. rose 18.8% in 2021. This is the largest increase in 34 years.
Couple that with …
- The soaring demand for quality housing
- The rising cost of rent; and
- The still historically low mortgage interest rates, even though they are higher then they have been in the recent past
… now may be the perfect opportunity for you to grow your retirement portfolio by making a long-term investment in a rental property.
#4: Hedge Against Inflation
If the cost of home values and rent increases faster than the annual rate of inflation, a rental property can also be a tool for warding off inflation.
Since the value of your rental property increases along with inflation, rising inflation is more easily countered in the real estate market than it is in other realms of the economy.
When inflation hits, your rental asset rises along with it, meaning you’ll have the income you need to handle things such as the cost of repairs and replacing appliances.
5 Top Tips for Buying a Rental Property From the Experts at PEGGY HOAG REAL ESTATE and HOAG PROPERTY MANAGEMENT
Are you considering purchasing a rental property as an investment? If so, you want to be well-informed before handing over hundreds of thousands of dollars.
Here are our top tips for what you should consider before investing in rental property.
#1: Pay Off Your Personal Debt
Unpaid medical bills
Credit card debt
If you are carrying any of these debts, it may be a good idea to pay them off before investing in a rental property.
The important thing is that you don’t put yourself in a position where you are short on the cash you need to make payments on your debt.
#2: Plan for a 20-30% Down Payment
Investment properties typically require a larger down payment than personal properties do.
Whereas you may have only had to put down 3% + on your current residence, you will be required to place a greater down payment on a non-owner occupied rental property.
Since mortgage insurance is not an option on investment properties, you will need to put down at least a 20% down payment.
#3: Learn the Landlord/Tenant Laws in Your State
It is also crucial that you learn and understand the landlord/tenant laws in your state.
Hiring a professional property management company is an advised option, unless you are willing to take the time to learn the landlord/tenant laws in your state. PEGGY HOAG REAL ESTATE and HOAG PROPERTY MANAGEMENT and have been managing rental properties for over 30 years. If you would like to explore having us manage your investment rental property, call us at: 503.906.1370
If managing your investment rental yourself, you will need to be well-versed in your obligations as an owner, as well as the rights of your tenants, to avoid legal hassles, in areas such as:
- Lease requirements
- Security deposits
- Fair housing; and
- Eviction rules
#4: Choose a Good Location
Location, location, location. It really is everything.
The last thing you want is to be stuck holding the lease on a rental property in an area that is going downhill.
When you are weighing the available options for investment properties, areas that have these factors will typically provide you with a larger pool of renters:
- A location that is experiencing an increase in population or that has a revitalization plan in the works
- Good schools
- A growing job market
- Plenty of amenities, such as:
- Parks and walking trails
- Swimming pools
- Coffee shops
- Low crime rates
- Easy access to public transportation
#5: Consider Your Operating Costs
The decision to buy outright or finance is going to depend on your investment goals.
If you decide to pay cash, you will most likely begin generating a positive monthly cash flow right out of the gate.
Say that the purchase price of your rental property is $100,000. After factoring in things like …
- Property tax
- Rental income
- Income tax; and
… you could potentially see around $9,500 (a 9.5% return) on your cash investment.
Alternatively, you may get a greater return through financing. For example, imagine you put down $20,000, or 20%, on a rental property with a compounding interest rate of 4%.
After subtracting your additional interest and operating expenses, you could be left with a potential increase of $5,580 per year. Plus your tenant is paying off your mortgage.
You will have a lesser cash flow — but your annual return of 27.9% is significantly higher than the 9.5% return you would earn if you were to purchase outright.
When Shouldn’t You Buy a Rental Property?
As with most investments, there are some potential drawbacks to consider when you are trying to answer the question, “Is owning rental property a good investment?”
Here are a few reasons why some people may not want to invest in a rental property:
- There is a lack of liquidity, since you may have money tied up for an indefinite period of time
- It requires a large down payment
- Rental income doesn’t cover the mortgage
- The income can be unstable
- It isn’t the get rich quick scheme some make it out to be
- Property taxes can be unpredictable
- Tenants can be a pain to deal with
Contact PEGGY HOAG REAL ESTATE and HOAG PROPERTY MANAGEMENT for All Your Rental Property Needs in Oregon or Washington
Thinking of investing in rental property can be overwhelming.
That’s why you need an experienced team of brokers to answer your questions and guide you in the right direction.
With over 30 years of experience in both real estate sales, representation and property management, with vast knowledge of the greater Portland/Vancouver/Columbia Gorge areas, the PEGGY HOAG REAL ESTATE and HOAG PROPERTY MANAGEMENT team has the expertise it takes to help you find, purchase and manage the rental investment for you.