Starting out a rental property business is both a risky and satisfying venture. But risks can be minimized and benefits can be optimized with much preparation and thorough research.
Owning and managing a rental property is not an easy walk in the park. There are many risks, mainly because the real estate market is volatile. But succeeding is definitely not an impossible task for those looking for long-term equity in the real estate industry, especially with the market’s growing purchasing power.
But before venturing into a leasing business, here are some pros and cons that you must know.
Owning a leasing business sure has its many advantages.
Increased profit margins
Renting your properties constantly to different people will allow you a higher return on investment compared to gaining one outright sum for a permanent purchase of a product. Moreover, mortgage interests, insurance, and maintenance costs are deductible against your income, which could result in a positive inflow of cash.
Appreciating property value
The good news is that as the population grows, the demand for residential and commercial properties will increase, translating directly into the appreciation of real estate rates. Owning a real estate business can also be great leverage during inflation. The market value of your property, and in turn your rental rates, increases annually, while mortgage interest, tax, insurance, and other major expenses may remain flat for several years.
Being a landlord is surely not for everyone. But unlike a regular full-time job, managing your rental property doesn’t require eight-hour shifts five times a week. Investing in rental real estate will provide you with a sense of independence, especially if being your own boss appeals to you. Having a rental business will help you move away from your day job and focus on the things you love while earning money. You may hire a property manager and enlist the services of a contractor for repairs to free up your time. Not only that, but you’re also owning significant real estate assets which you could sell in the future or pass on to your offspring.
Just like any other business, leasing a property has its own challenges.
Maintenance and repair
Your property will soon have to deal with damages as you lease them to different people. Wear and tear will eventually call for some maintenance and repairs. Walls will have to be repainted, new carpets might need to be installed, leaking roofs and ceilings will have to be fixed, and a thorough cleanup will have to be done after a tenant moves out. All of these are mandatory before you can put it back to the market for leasing again. The construction materials and/or home equipment you need to buy might put a dent in your revenues. If the property has to undergo major repairs, you might need the assistance of professional laborers. If you don’t have any financial cushion, the expenses for repairs and maintenance, on top of mortgage payments, tax bills and insurance premiums, may compel you to take money from your personal savings.
One of the biggest risks in running a rental property is that the market is not liquid. That means your property may have to sit on the market for a couple of weeks up to several months before it hits a successful rental sale. You may not be able to lease your property with the best price if your timing is driven by unexpected needs and other demanding circumstances. Not only that, taxes and insurance premiums may also spike up in the wake of a disaster or other undesirable economic conditions.
When you start leasing your properties, you might soon find out that being a landlord is not your strongest suit, especially when dealing with renters who are demanding, late payers, and worst, don’t have the slightest idea on how to take care of your property. Despite your due diligence in screening your prospective tenants, there’s always a chance of encountering unreasonable occupants.
If you’ve resolved to own rental property business, here are some tips to help you start out.
Do your research
The initial step in starting a real estate investment is doing extensive market research. You must research all the different aspects of rental properties and learn as much as you can before risking your hard-earned money. Focus on learning the types of real estate properties, investment strategies, demand drivers, and economic indicators that are used to predict the market’s direction. You should also study the tax rules that apply to each property class. Knowing the expected amount of rental property income and the annual expenses of owning a rental property will help you solidify your business decision.
Pick a niche
Once you’re done with your initial research, pick a niche market. There are different types of rental properties, with their own advantages and disadvantages. Decide whether you want to go for long-term or short-term rental properties.
Choose a financing method
Another important consideration in venturing into the property market is the financing method to purchase the property. Paying the property with cash will promise higher profits, though you may have to pay larger upfront costs. Using mortgage, on the other hand, is a more typical option because the rental income from tenants can help pay off your mortgage. Though this may yield smaller profits in the early years of your business, it will eventually produce higher profits in the long run.
Investing in the rental market involves a lot of risks. But it’s not rocket science. Anyone can start a rental property business. With the right preparation, proper research, well thought-out business strategies and enough financing, you might just find your gold mine.
Lamudi is awarding the top real estate professionals who have shown excellence in their practice in the past year through The Lamudi Broker Awards Night, happening on February 21, 2019, at Makati Shangri-La Makati. To know more about the event, visit the official page.
Sources: Home Business Mag, Chron