Interest rates and mortgage prices lower than they’ve been for years, and as a result, more and more people are looking to invest their money in income properties—in other words, real estate purchased with the sole purpose of making money.
The idea of buying a budget house or condo, finding tenants, and collecting monthly rent seems like a very attractive option to many people looking to invest their money, especially considering the turbulent state of the stock market. That said, much like making any investment, there are both pros and cons to consider before purchasing an income property.
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Here are a few things to keep in mind before purchasing an income property:
You receive a guaranteed monthly income.
Receiving monthly income is undoubtedly one of the most attractive reasons to invest in real estate. Ideally, after making your property’s down payment, the rent paid by your tenant(s) will take care of the rest. Once the property’s mortgage is paid off, you can either continue renting and receive monthly profits, or re-sell your real estate.
You must accept the responsibilities of being a landlord.
On the flip side, just like your own home, rental units require regular maintenance, and often emergency repairs. It’s your responsibility to ensure that your tenant’s living conditions in your property are safe and comfortable.
Moreover, tenants can present huge challenges to landlords by not paying their rent on time, receiving noise complaints, or destroying property.
Some investors may opt to hire a property manager or superintendent to deal with such issues, but keep in mind that this will involve paying a salary, therefore lowering the value of your investment.
The real estate market is unpredictable.
In an ideal scenario, you would purchase your property, pay it off, and then sell it for twice as much. Unfortunately, the property market is volatile, and if you want to be a real investor, you must accept the fact that a house you purchase for $300,000 may be worth half as much in 20 years. On the other hand, it might double in value instead.
Moreover, though there’s a chance that your property may depreciate in value, it’s likely that you will still make a profit from it. For instance, suppose you make a $20,000 down payment on a $200,000 home, and pay off the remainder of your mortgage with your tenant’s rent. Even after considering maintenance costs, you will most likely be making a profit on your property, even if you sell it for half of what you paid for it.
As a landlord, you’ll receive certain tax breaks.
Though you’ll be responsible for certain maintenance costs, you can also look forward to reducing the taxes you owe by deducting the following expenses from your income:
- property taxes
- mortgage interest
- utilities that are included in rent
- property maintenance
Ultimately, just like investing in stocks or bonds, purchasing an income property is a gamble. Though real estate has the potential to reap major financial rewards, it runs just as many risks—a fact that any real investor must be willing to accept.
I would love to have a four-plex apartment building, preferably brick. I would turn it over to a real estate agency for collection and property management.
Well, it is still an investment after all. It could pay off and yield the returns you want but it may also not. The good thing about real estate is that it has up’s and down’s. If it’s down this year, it could grow stronger next year. If you could not sell it, you could have it rented. The market is very big because everybody needs a house anyway.
You are certainly correct. The good thing about it, is as you say, people need houses. If the property is well maintained, you will still be able to have an income. Which is quite positive.
Yep, being a landlord is hard work. That’s something that I think many people who jump into the income property game don’t remember. But, if being an active landlord doesn’t appeal to you, you might be able to find a property manager and still make money… That’s always an option.
It is a dream of mine to find a really good deal on a home and turn around and rent it. I’m not sure why I would want the responsibility of being a landlord? I am currently a renter and get frustrated with landlords and property managers.
I truly believe that owning income property is one of the best ways to a wealthy retirement. Considering all of the points mentioned in this article, it’s difficult to think of a more “evergreen” niche to invest in.
As a first-time home buyer, be sure to check out government property grants/supports. In Canada, you can apply for up to a $25,000 loan that can be paid off over a 15 year period. Everyone says now is the time to buy a property. Be careful though, it seems like the Condo market is not the right property to buy.
The idea of owning income property is on the face of it very appealing, but as you point out there are the responsibilities of being a landlord to consider.
I could imagine finding and keeping responsible tenants would be a challenge. I had a brief experience of what that might be like when I sublet my apartment for several months when I relocated temporarily for a job. It was a bit stressful, as the tenant was habitually slow in paying. But at least she did pay!
Real Estate is usually a secure form of investment. The proper way to access whether a certain property is worth buying is as follows: the price should not be higher than the equivelant of the 10 year rental income of such a property….
My husband and I would like to be landlords. There are quite a few properties that have come up for sale in our area in the past couple of years that have very reasonable prices. We have hesitated mainly because I worry about the “what ifs.” What if the tenant does not pay and we have to pay it out of our pocket? What if they vandalize the property? We have two friends who rent houses and apartments out. Their opinions vary depending on how good their tenants turned out to be. We will still probably try it out before long.