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Why Everyone Should Own At Least One Rental Property

When considering all assets, real estate has the most significant potential for long-term profit. That’s why people invest in real estate — to build wealth. While you can start making...

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This story originally appeared on Due

When considering all assets, real estate has the most significant potential for long-term profit. That’s why people invest in real estate — to build wealth. While you can start making money now, real estate is ultimately a long-term strategy.

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If you don’t own any real estate properties, it’s worth some serious consideration, especially if you plan on passing on wealth to your children.

Consider the revenue potential.

Owning real estate means you have an income-generating asset that will continue generating income virtually forever.

You’ll have some downtime when your unit is vacant, but that’s normal. However, once you pay off your mortgage, your rental income becomes pure profit — minus your expenses.

How much profit can one property generate?

Your profits will depend on how you use your investment property.

There are several different investment strategies. For instance, you can turn a property into a rental property, flip it, or use it strictly as an Airbnb business.

If you plan on fixing and flipping, it’s wise to get your real estate license. Consider that getting a real estate license is more accessible, easier, and more affordable than you might think.

Having a real estate license will make it easier for you to post listings on the MLS without going through a third-party, and you’ll be able to do so much more as a bonafide agent. Your profit potential will also increase once you get your license.

If you’re not interested in doing all the work to fix and flip, and you’re not keen on running an Airbnb business, rental property is the best choice.

How much profit can you generate from a rental property?

The exact amount of profit a rental property generates depends on a multitude of factors, most notably your expenses.

While any profit is good, you should aim for making at least $100 profit per property. This amount of income might not seem like much at first. However, $100 per month adds up fast when you have multiple properties.

Besides, real estate investing is a long-term wealth-building strategy. Of course, you’ll only make that $100 in profit once your mortgage is paid off. But, once you make the final payment, your earnings will increase by whatever amount you were paying to your mortgage company.

Let’s do some math.

Say you own one property, and your mortgage is $2,200/month, and you rent the property for $3,000/month. After expenses (40% or $1,200/month), your profits are $400/month.

After expenses, once you pay off your mortgage, you’ll have $1,800 in monthly rental income that is pure profit. Multiply that by two, three, four, or five properties, and it’s easy to see how your monthly profits can add up quickly.

Here’s how to figure out if an investment is worth your time.

An investment is worth your time if you can acquire it at a fair price, you can cover the mortgage with the rent, and it doesn’t need more repairs than you’re willing to handle.

First, use an online calculator to estimate your rental profits. If you can’t generate at least $100 per month in profit, it’s probably not worth buying.

Factor in unforeseen expenses.

Remember that unforeseen circumstances can take large chunks out of your profits.

You’ll need some extra cash on hand to take care of these expenses. For example, you might run into the following situations:

  • A city tax assessment. If the city needs some kind of municipal repairs, homeowners foot the bill. These bills can be upwards of thousands of dollars in some cases.
  • The property needs a new roof. Unfortunately, roofs are expensive to fix and replace. Depending on what’s wrong, you could be looking at a $10,000 bill. But, hey, they are guaranteed for 25 years.
  • The property needs a new water heater. If you don’t know when the water heater was last replaced, it might die sooner than you’d like. Water heaters aren’t cheap. While you can find some online for $300, you might also find reviews that state they caught the house on fire. If you need a water heater, you’ll need to get a professional installation.
  • You need a new well water pressure tank. Pressure tanks have bladders inside that create water pressure. Over time, these bladders hold less air and create less pressure. When a pressure tank starts to fail, a replacement can cost around $1,400 for an 80-gallon tank. Keep in mind that an 80-gallon tank only holds 20 gallons of water as the majority of the space contains the bladder.
  • You need a new well pump. Depending on your setup, a new well pump can cost several thousand dollars.

All of these expenses are already daunting on their own. Be prepared to possibly face more than one expense at a time. A low-profit margin will make it hard to recover from these kinds of costs without dipping into your personal savings account.

If you encounter significant expenses frequently, you’ll struggle to become profitable before you pay off your mortgage. However, if you don’t incur substantial expenses frequently, these can even out over the course of several years.

Which type of investment is ideal?

There are four primary types of real estate investments you can acquire. Which ones are ideal depends on your budget, your location, and the market. Generally speaking, you will have the following four options:

1. Residential Property (Single-Family and Multi-Family)

You can buy residential property and flip it or rent it out. Residential properties can be highly profitable long-term. One key to maintaining a profitable rental unit is to stay on top of repairs and be selective about your renters.

Set high standards for your tenants to stay profitable and minimize potential damage. For example, require tenants to make at least two to three times the monthly rent and have a minimum credit score of 650. In addition, require everyone who lives in the unit to be on the lease.

It’s relatively easy to acquire residential rental property, so this is where most new investors start.

2. Commercial Property

Commercial property has the potential to be more profitable than residential property, although it comes with a higher mortgage payment and sometimes more responsibility. For example, you’ll have to get commercial property insurance.

When you own commercial property occupied by multiple businesses, your property will see some high traffic that might not always be respectful. You, basically, increase the risk of property damage and other problems, especially when the general public has access to the plumbing.

When you’re new to real estate investing, start with residential property and then move to commercial. Get the hang of being an investor and landlord first, and then look into acquiring commercial property.

3. Industrial Property

Industrial real estate is property used for developing, manufacturing, and producing. In addition, industrial real estate generally includes logistics, storing, and moving products. These aren’t fancy buildings, but they are a staple in every community and the entire global supply chain.

If you have enough capital to invest in industrial property, you may want to start small to get the hang of being an investor. Unless, of course, you have someone to help you along the way.

4. Land

Raw land is an excellent investment for anyone with or without investment experience. There’s no building to manage, no repairs, and it’s almost maintenance-free. In addition, land is the type of investment you want to buy and hold since it only appreciates value.

Land is always in high demand.

There have been many instances where investors have purchased run-down homes for 400% more than they’re worth simply to have the land. They then bulldoze the dilapidated property and build something new.

With rural land, you’ll often have enough timber to sell off and cover the cost of the land. Of course, this isn’t true for all areas, but it is for many. For example, it’s not unheard of for someone to buy five acres for $120,000 and sell $80,000 worth of timber they had to clear to build their home.

Some trees are worth more than others. For example, if you find land with veneer hard maple, each tree can be worth thousands of dollars. For many reasons, land will prove to be one of the smartest investments you’ll ever make.

Real estate remains one of the top investments.

There are a few things worth investing in, like real estate.

Technically, gold and silver bullion is a close second. You can never go wrong investing in gold and silver bars, coins, and currency. Unlike investing in stocks, gold and silver are relatively safe investments. The value constantly fluctuates, but it always trends upward.

Real estate is the same way. Home values are constantly fluctuating, but the value will only rise (unless your property is falling apart or condemned).

Invest in real estate to invest in your future.

Real estate is perfect for first-time investors looking for an opportunity to create a secure future.

It’s not hard to invest in property. You can take courses online and, if you decide to get your real estate license, you’ll learn things that will help you get better deals.

If you’ve been looking for a great way to invest in your future, start with real estate. Once you buy your first property or plot of land, it won’t take long to see why it was the best decision you’ve ever made.

The post Why Everyone Should Own At Least One Rental Property appeared first on Due.