One of the most appealing aspects of getting into the business of rental properties is that there is a real possibility of creating long-term retirement income. For many people, this is a viable route to financial independence as well as the lucrative re-investment potential.
The reason why investment in rental properties are likely to result in your financial independence is that you have the ability to charge rents that will keep up with the rate of inflation, unlike other investment practices such as annuities or stocks. Every business knows the importance of cash flow to their balance sheet. Even as a beginning investor, you can appreciate the value of having 10% or more return on your investment — in cash income.
Additionally, this rental income is almost always more than the mortgage payments you will make on the rental property. When correctly chosen and managed, the property can create the passive income you need for reinvestment or personal recreation.
Types of Rental Properties
There isn’t just one type of rental property, of course — there are plenty. Here are the more common forms of rental property that you might consider for investing purposes:
- Commercial Properties. Although commercial properties have very attractive potential for return on investment, they also have greater risk factors than the residential rental properties. One risk factor is that they are closely dependent on the local economy, in which case potential investors should research the trends of the area’s most lucrative industries as one source of investment information. The other factor to consider is the difference between bank loans for residential properties compared with commercial loans. The bank you use may claim to use a single criterion for these loans, but more likely than not they will review your individual case in order to determine whether to make the loan, and at what interest rate.
- Rental Houses. Rental homes in the way of actual houses certainly have many market advantages over other types of rental properties. They are known to attract higher-income tenants, they may be used in a rent-to-own transaction, and they are a highly sought-after living arrangement. Tenants of rental homes may often agree to sign a long-term lease contract. The potential downside is that they may require a great deal of repairs and the tenants may behave in ways that cost you more than they bring in. The more rental properties you have, the more likely it will be that these issues can get out of hand. In this situation, many people find it cost-effective to outsource their problems to a professional rental management company.
- Cheaper Duplexes. Duplexes are interesting investments, and in many cases can be financed as homes, provided there are fewer than five units. The low-income units may offer opportunities for section 8 vouchers or federally subsidized rents, which are good for keeping your rental revenues consistent. Low-income housing has the advantage that this demographic typically is in constant need of housing, and the expenses are lower than many other types of property. The potential disadvantages are greatly linked with how the property is managed.
- Apartment Complexes. Why is an apartment complex a great way to make a killer profit, provided you have the start-up capital required to initiate the investment? Apartments typically require fewer and less costly repairs than rental homes, for example. Apartments can be converted to condos, which can then sell to other investors or potential owners.
Refinancing can allow you to withdraw the equity and reinvest it to spread out the potential risk, and high-quality tenants are a gold mine. Strategies you may use to get the most out of apartment rentals include: rent increases, expense lowering techniques, renovation, financing and more.
Creating the Passive Income
Hiring a professional property management company may help you maximize your investment and free up your time for other pursuits. From tenant screening services to property inspections, from property evaluating to marketing, outsourcing the “dirty work” of property management is an effective way to get the most out of your property with the least amount of worry.
Many novice landlords do not stop to think about what they would do if the tenants cause disturbances, don’t pay their rent on time, or damage the property. This can easily turn your dream of financial independence into a nightmare that you must still pay mortgage on in a timely manner. Without a viable rental plan from start to finish, the profit you hope to realize could evaporate.
While some people feel that they have the personality to handle every emergency, including the 2am phone calls, many people find that the right management company is well worth the nominal fees, compared to the potential renter headaches.
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