May 30, 2024
Everyone is on the lookout for ways to supplement their income. For a lot of people, the income from a single stream just doesn’t cut it anymore. With the trend of single-person companies and novel entrepreneurship ideas, it is easy to forget about real estate.
The truth is that purchasing properties is still one of the best investments you can make. With a finite amount of land available, every single foot that you own gives you considerable power.
However, while flipping homes is a well-known strategy, what about long haul renting? Did you know that more than one million rental units are set to be ready for sale by 2025? Renting out has a lot of potential and it would be foolish not to give it some consideration.
In this article, let us find out whether buying properties to rent them out is something you ought to be doing. Let us dive in.
When people think of becoming landlords, they think of “easy money.” After all, how tough can it be? Once you own the property, all you have to do is rent it out and then collect checks every month. Maybe you have to deal with some minor maintenance issues, but it is simple otherwise, right?
Well, not exactly. You see, renting out a property is not passive income. It is more like a part-time job. Very rarely do you have perfect tenants who make the entire experience seamless. Even if you find a perfect tenant, they do not stay with you forever.
Then you have to consider the different places where you lose money. For instance, when you are unable to find tenants, a vacancy becomes a passive loss rather than a passive income. Similarly, you have to pay property tax whether you have a tenant or not. If you have hired a property management firm, then that is another place that takes your money.
Of course, not all expenditures are bad. Paying for landlord insurance can be extremely useful because it covers damage that would otherwise cost you a pretty penny to fix.
As Hippo states, when you are a landlord, you are responsible for your home’s structure and appliances. This means you can be held liable if your tenants somehow get injured. Thus, landlord insurance ends up helping you in this way as well.
The point we are trying to make is that renting out a property is not just an income source. It can also be a source of expenditure, and if you fail to find tenants, it actually puts you in a state of net financial loss.
Okay, so we know now that buying property to rent out is not a good idea if you want to take a hands-off approach. However, what if you are willing to put in some effort? Well, in that case, renting out can be a surprisingly sound decision.
There is a reason that people get attracted to real estate and renting in the first place. This is not a scam or a Ponzi scheme but a perfectly legitimate investment strategy that works. Yes, buying property is expensive, and it will take years to pay off the mortgage but try to think of that as the buy-in price.
With a little effort and know-how, you can turn your properties into fantastic sources of income. Yes, your earning potential will heavily depend on location and other factors, but you probably know that already. If you manage to snatch a property with the potential for multiple tenants, you are looking at a considerable amount of money every month.
If you learn how to take advantage of options like mortgage interest deductions, you can also reduce the interest you pay on the loan. This would require that you keep detailed records of each mortgage payment and ensure that you separate interest from the principal amount.
Similarly, you can use Schedule E (Form 1040) to include operating expenses that went into maintaining the rental property. These are just a few examples of ways that you can save on taxes and maximize your earnings.
You see, even if you start out wishing to use a property only to rent it out, it is still yours. Sure, someone else lives in it, but it is easy to forget just how useful it is to own property. To be specific, stop thinking of it as a property and think more like it is an asset. Assets are the path to wealth, and real estate is one of the best assets to own.
In a sense, it can be a leveraged investment. When you borrow money to buy property, you pay a down payment of, say, $100,000. You do this to receive an additional $400,000 (the loan) to purchase a property worth $500,000.
With time and appreciation, this property’s value might increase by 10%. On paper, that means it is now worth $550,000. However, in reality, this actually means a whopping 50% return on your initial investment of $100,000.
Learning how to use leverage in this manner can drastically amplify your ROI. It is a simple concept that many people fail to take into account when they think of buying properties. Remember, you are not bound by an unbreakable contract that you can never sell and can only rent.
Sure, there is a bit of risk involved, but at some point, you have to accept that risk is part of the big game.
In conclusion, is buying property for real estate worth it? Well, that is a loaded question. Are you someone who expects it to be a cakewalk with checks landing on your lap at the end of every month? If so, then maybe not,
However, if you understand that owning property gives you control over a valuable asset and are willing to put in some work, Then, most definitely, the answer is yes. Investing in real estate can be one of the best decisions you make. It does not require a degree, yet is still one of the most profitable niches to work in.