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Is Rental Property a Good Investment?

Rental properties can be a profitable investment.

Rental property can provide investors with various sources of income. However as with any investment, rental property investments do have risk, and investors can lose money. To determine whether owning rental property is a good investment, investors should understand the key points needed for a successful rental property and decide for themselves.

Rental Prices

  • Buyers should consider the cost of the rental property in relation to the expected amount of rental income that the property will generate. Buyers should compare prices of rental properties against the expected rental income for each building to determine which properties are selling at the best price. One way to compare rental properties is to look at how long it would take the rental income to pay off the building. For example, it would take 10 years for a building that costs $300,000 and produces $30,000 a year in rental income to pay for itself (not including financing costs).

Rental Market

  • Sellers of rental property should be willing to provide buyers with information on current and past rental income. However, this does not indicate that the future rental incomes will be the same. Buyers must consider the area and local economy. Areas dependent on one large employer are less stable than those with multiple employers. New building in the area will also work to depress the rental market as newer spaces come onto the market and compete with the older buildings for tenants. Rental property owners must carefully consider the property’s future prospects.

Costs

  • Owners must consider financing costs before buying a rental property. Interest rates and fees for loans for rental property are often higher than rates and fees for loans to purchase a primary residence. The costs of maintaining a rental property can also create a significant expense. Owners must keep properties in good repair at all times to maintain income from rentals and assure compliance with regulatory codes. While insurance covers many significant expenses, owners must maintain access to money to cover deductibles and uncovered expenses.

Management

  • The management of a rental property is an area that can produce both significant costs as well as hassles for the rental property owner. Management of the property includes screening and selecting tenants, dealing with tenants (while following all applicable laws and regulations), and caring for maintenance issues. Owners can choose to use a property management company, but owners should consult with these service providers before purchase to determine the costs that they will charge.