Investing in rental properties is one of the oldest ways to make a return on investment. Millions of investors in North America hold multiple homes and many have increased their net worth by renting their property to tenants.
The owner, or landlord, is responsible for paying the mortgage, taxes and all costs associated with maintaining the property. The tenant pays the rent to enable the landlord to cover the expenses incurred and ideally to receive an amount in excess of expenses to remunerate the landlord for the investment risk and work of managing of the property.
A landlord may also charge more in order to receive a monthly profit but this will depend on what the rental market can support. The most common strategy however is to charge enough to cover the expenses until the mortgage has been paid down and the mortgage payment declines, at which time the increasing difference between the income and expenses becomes the landlord’s profit.
As well, the annual inflation rate may cause the property to appreciate in value over the course of the mortgage being retired, leaving the landlord with a more valuable asset in the end than when it was purchased.
There are, of course, risks to the investor on the face of what seems like an ideal investment. If you end up with a bad tenant who damages the property, or fails to pay the rent or, should you end up having no tenant at all for a period of time, then cash flow may be tight as the landlord would have to pay the mortgage and maintenance/repair expenses out of pocket. Having a reserve of cash that may have been accumulated from prior rental surpluses is advised whenever possible.
As well, there is the matter of finding the right property. Not all locations are the same when it comes to owning a income property. Indeed, some locations are downright bad choices for your investment. You will want to pick an area where vacancy rates are low and where the amenities and conveniences are appealing to those who want to rent.
One of the major differences between a rental property and other investments is the amount of time and work you have to devote to maintaining your investment. If you buy a bond or stock, it will simply sit in your brokerage account and either go up or down in value depending on the fluctuations of the economy and other factors without much of any effort on your part. If you invest in a rental property, there are several responsibilities that come with being a landlord.
Eg. Should the power go out or the plumbing begin to back up, you will be the one who gets the phone call. If you are able to do the handyman work, you may save something on the cost of the repair; otherwise, you may like to hire a professional property manager who would be happy to take the problem off your hands. Of course they do charge a fee for service and the rental income may not always exceed the added costs.
I have been a landlord for many years now and I have never lost money on a real estate investment. It has not always been easy work but it has always been profitable! If you would like to have more information on buying an investment property, be sure to give me a call. Helping investors of like mind is one of the things I love to do!