Is a Rental Property a Good Idea?
When it comes to concerns about money, one of the pieces of advice that our customers hear most frequently from their friends and family is to invest any excess income that they have in rental properties. This is one of the pieces of advice that we give to our clients. One of the pieces of guidance that our customers take to heart the most is this particular one. Sadly, with just a few noteworthy exceptions, the overwhelming majority of people will think that this is awful advice. It is extremely unlikely that it will generate the income that you anticipate, it is difficult to generate a return that is compelling, a lack of diversification is likely to hurt you in the long run, and real estate is illiquid, which means that you can’t always sell it when you want to. It is highly unlikely that it will generate the income that you anticipate. It is difficult to generate a return that is compelling. The following is the most crucial of these reasons: it is quite improbable that it will create the money that you anticipate having generated by it. Finding ways to earn a return that is enticing might be challenging.
Before you make the decision to purchase a rental property as an investment, you should carefully analyze the many factors that make it improbable that you will come out ahead.
Are you considering the purchase of a property to use for investment purposes? There are numerous reasons to believe that real estate is a good investment, including the fact that it has been responsible for the creation of many of the wealthiest individuals in the world. However, industry professionals are in agreement that prior to investing hundreds of thousands of dollars on anything, it is preferable to have a solid understanding of the subject matter. The following is a list of items that need your attention and investigation.
Real estate investors should get their feet wet by purchasing properties that may be used as rental units. Rental properties have the potential to provide cash flow in addition to value through appreciation. In addition, real estate ownership can result in favourable tax breaks and deductions for investors.
There is a lot to learn before investing in rental properties, despite the fact that this type of real estate investing has the potential to be quite profitable. This in-depth manual will show you how to get started as a novice investor in real estate by purchasing rental properties. We will discuss what is required to invest in rental properties, typical pitfalls that should be avoided, and other information that should be known before purchasing your first rental property.
Real estate investors should get their feet wet by purchasing properties that may be used as rental units. Rental properties have the potential to provide cash flow in addition to value through appreciation. The lack of diversification is likely to hurt you in the long run, and real estate is illiquid. There is a lot to learn before investing in rental properties. This guide will show you how to get started as a novice investor in real estate.
What is the rental property?
A residential or business property that is leased or rented to a tenant for an extended length of time is referred to as a rental property. Rental properties can be of either the residential or commercial variety. Long-term rentals include those with a lease that is anything from one to three years in length. Short-term rentals include things like holiday rentals.
Single-family homes, duplexes, triplexes, and quadplexes are all examples of residential rental properties. In addition, residential rental properties can have anything from one to four separate families living in them.
A few different classifications may be applied to commercial rental properties. These include multifamily (apartment complexes), industrial (such as a warehouse or self-storage), office space, retail space, and multi-use.
Because of their often lower prices, residential rental properties are frequently easier for novice investors to have access to. Because less money is necessary initially, acquiring finance for the endeavour is typically much simpler. There are always going to be outliers, but in general speaking, residential rental properties are simpler to administer. The management of one tenant is often simpler than the management of twenty tenants.
Because of these factors, the residential rental market is where this in-depth guide on investing in rental properties places its primary emphasis.
The majority of investors purchase rental real estate with the intention of achieving positive cash flow, which is making more monthly revenue than they do each month in costs. Although attaining a positive cash flow is a typical objective of rental investing, it should be noted that not all rentals initially provide positive cash flow.
The ownership of a rental property is a sort of active real estate investment that demands time, attention, and engagement on the part of the investor. There are certain people who aren’t cut out to be landlords. The process of locating, evaluating, purchasing, and managing a high-quality rental property is labour-intensive, as you will see in the following paragraphs.
The advantages of being the owner of a rental property, while they may not be very many, are rather substantial. To put it more succinctly, if you have a rental property and everything goes according to plan, you can generate a significant amount of money from it.
Income from Renters
The fact that renters will provide you with a direct money stream is the most significant benefit of owning a rented property. Those monthly rent checks are sent immediately into your company’s account, and presumably, they will pay all of your expenses for that month.
If you own a piece of real estate and rent it out for AU$1,000 per month, for example, when it is entirely rented out, the residence will contribute AU$12,000 per year back into your accounts.
It’s impossible to deny when dealing with a direct cash source like that. However, it’s important to remember that these forecasts are based on a positive scenario. You shouldn’t expect this type of outcome from the endeavor, and it’s critical that you keep this in mind at all times. Even a small fraction of the outcomes, though, might be rather good on their own. For example, even if you can only rent the house for 75% of the year, you will still generate $9000 Australian dollars each year.
Income from Property Value Growth
In addition, because you own the property, you stand to benefit from an increase in the property value over time due to changing demands in the region, even if the property itself does not go through any improvements. This is the case even if the property does not go through any renovations. This remains the case even if there are no other changes made to the property.
Because a great deal of it is determined by the neighbourhood in which your rental property is located, this characteristic is likely to be subject to a great lot of variation. There is a chance that, over the course of a few years, the value will skyrocket in some areas, while in other areas it may continue to hold steady at the same level. If we lived in a perfect world, this price hike would at the very least be equivalent to the rate of inflation. On the other hand, if you live in a region that is seeing growth that is far lower than the average, you might discover that you are unable to even keep up with inflation. Living in a region that is seeing growth that is superior to the average is in contrast to this.
You should also consider that your sweat equity is likely to add more value to the home as you continue to maintain and improve it. Again, this is an important consideration to make. For example, without incurring significant additional expenses, you may add value to your property by performing projects such as repainting the exterior and interior, installing new siding, refinishing the inside, performing some simple landscaping in the yard, and so on.
Not only will you be able to increase the amount you charge for rent as a result of this, but you will also be able to sell the home for a higher price in the event that you decide to do so in the future.
If you are the type of person, who gets a kick out of working on home renovation projects, purchasing a rental property should be a huge draw for you. You will have the option to fix it upon purchasing and even while it is vacant, which will result in excellent dividends for you to collect in the future.
On the other side, there are a number of drawbacks associated with owning a property that is used for renting out space. Although each of these drawbacks isn’t too significant on their own, they create a significant problem together.
Concentration of Assets
One of the drawbacks of investing in rental property is that, for most people, doing so results in a significant increase in the amount of their assets that are concentrated in one location. As a result, it would take a large chunk out of the net worth of the typical Australian for them to be able to purchase a rental property completely.
The issue with such level of focus is that it does not at all feature any diversification. This investment is in a particular home located on a particular street, in a particular neighbourhood, in a particular city. If that neighbourhood goes downhill, you lose a lot of money. If that block continues to decline, you will suffer significant financial losses. In the event that your home suffers damage that is not covered by your insurance policy, you stand to lose a significant amount of money.
You are going to be tied in very closely to the local real estate market if you own a rental property, regardless of whether or not you like this fact about yourself.
The concentration of assets is not a prudent approach for financial investing. The more money you have, the less of an issue this becomes, and the more property ownership becomes a tool for diversification rather than a single focus. To put it another way, the more money you have, the more you can afford to be concerned about such things. This is owing to the fact that as your wealth grows, the importance of this factor diminishes.
There is never any guarantee that a tenant will pay their rent, therefore you should never count on that happening. Even in the best of conditions and even with the (supposedly) best renters, that stream of cash is in no way guaranteed. Even in the best of situations. Even under the most favourable circumstances.
It’s possible that every once in a great while, you’ll come across a superb tenant who pays their rent on time for years and years and years, but you can never bank on it happening. There are tenants who won’t pay on time, and there are renters who won’t pay at all. Some of the renters won’t pay at all. Because of this, you will be out a significant number of months’ worth of rent, in addition to the time you spent dealing with the tenants’ inability to pay rent and evicting them.
It’s possible that some tenants will cause significantly more damage to the property than others throughout the course of their tenancy. Even though you will have the security deposit, this is still going to be an expense for you, not to mention a danger.
There is also the possibility that you won’t be able to find a renter at all, leaving you with stretches of time during which the rental property won’t bring in any money. This is a risk that you should be prepared for.
Taxes and Fees and Insurance
You will still be responsible for all of the costs that are associated with the property, regardless of whether or not there are people living in the house. These costs include the cost of property taxes, the cost of insurance on the property, and the cost of any homeowners association fees that are associated with the property. The cost of the property’s insurance is included in these expenditures as well. These expenses are going to have to be covered regardless of whether or not there is a tenant currently occupying the dwelling in question.
This is a fairly consistent expense that you will be aware of in advance, but regardless of how you cut it, this is a cost that will reduce the amount of money that you make. In addition, it is extremely unpleasant if you do not have someone renting the home because this indicates that such expenditures are going to come directly out of your own wallet. As a result, it is especially uncomfortable.
These expenses are not negligible by any means. To provide just two examples, the insurance premiums for rental properties are often roughly 25 percent more than the premiums for a standard homeowners policy, and property taxes are not something to be taken lightly. So if you find yourself in a position where you do not have a renter or if you have a tenant who is not paying rent, this will have a direct and severe impact on your financial situation.
Even in the “hands-off” scenario with the least amount of involvement from you, this rental property will still require a significant amount of your time. At some point, it will require maintenance or repair. You will eventually be required to check in on it. You will, at some point, be required to engage in conversation with the occupants. At some point, you will be required to complete documentation of one form or another.
You can get rid of this issue by working with a management business, which is something that will be covered in the next section. However, doing so will reduce the amount of money you make from renting out the home.
So you shouldn’t buy an investment property if:
You purchase a home to reduce your tax burden.
A great number of unsophisticated investors consider negative gearing to be an investing strategy.
When the costs of holding a property, such as the interest on the loan, bank charges, upkeep, repairs, and depreciation, exceed the property’s revenue, the property is said to be negatively geared.
To my way of thinking, this is not an investing plan; rather, it is a short-term funding strategy, which makes sense only when used to the acquisition of investment-grade properties with strong potential for capital growth.
These properties are often well-established homes, townhouses, or flats situated on desirable streets and in prime locations inside the inner and middle rings of the suburbs surrounding our three major cities.
You’re purchasing because you’re dissatisfied. You’ve been missing out on the latest real estate boom.
Have you ever heard of FOMO, which stands for the fear of missing out on something?
When people hear about the windfalls earned by individuals who acquired the property a few years ago, it is often at this moment in every property cycle that the event takes place. On the other hand, given where we are in the property cycle right now, investors would be wise to exercise greater restraint rather than being overly bullish.
Although it is a natural and acceptable feeling, making financial decisions based on feelings rather than logic almost always results in poor decisions.
And it is just this kind of feeling that makes you a prime target for property marketers and spruikers who will give you a method to get rich quick and take advantage of your desperation.
You desire instant wealth
Beginner investors frequently desire to “become rich quick.”
Property investing, however, requires patience and time.
According to my research, it takes thirty years for the typical real estate investor to achieve financial independence.
When we first begin investing, everyone of us will inevitably make errors in judgment, and it may take 10 years before we fully understand what not to do.
After that, it takes three to five years to repair the mistakes made during the first decade, often including the sale of unprofitable assets.
After that, you’ll need two solid real estate cycles in order to construct a sizeable asset base consisting of investment-grade buildings.
When Warren Buffet remarked, “Wealth is the transfer of money from the impatient to the patient,” he expressed this concept quite well.
You have no idea how real estate investing works
Many people are under the incorrect impression that they are knowledgeable about property investing just because they own a home or have previously lived in one.
As a result, people wind up purchasing a home that is situated in close proximity to their desired location for living, retirement, or vacationing.
When it comes down to it, these are all irrational reasons to buy a home rather than picking one based on the fundamentals of a good investment.
On the other hand, successful investors have devised a robust investing plan that complements their risk profile and assists them in accomplishing their long-term objectives and is one that has been able to withstand the test of time.
If you’re not financially fluent money
If you do not have the ability to develop a budget, spend less money than you make, save money, or effectively manage debt, then real estate investment may not be the best option for you. This is due to the fact that the considerable amount of debt you will incur to finance your investment will either put you in a terrible financial condition or keep you up at night worrying about money.
Both of these outcomes are undesirable. Consequently, if you have never been instructed on how to construct a budget, spend less than you make, and save money, or if you are not skilled at managing debt, investing in real estate may not be the best choice for you.
Keep away from the property until such time as you have gained a greater understanding of the power that leverage, compounding, and time have over properties that are well-located.
Sadly, a large number of people have a fear of debt because they do not have a clear understanding of the distinction between undesirable debt and desirable debt. If you are one of these persons, you should avoid purchasing the property until such time as you have a clearer understanding of the distinction between undesirable debt and desirable debt.
If you want a multipurpose property data
Suppose you are purchasing real estate with the intention of building wealth while simultaneously using it as your future home, as a place to spend part of the year on vacation, or as a place to retire in the future. In that case, it is possible that you are expecting too much from a single piece of real estate.
It has never been my experience that a property with many uses generates superior returns on investment; obviously, something has to give.
To begin, there is an inordinate amount of emphasis placed on sentimental factors in this scenario.
If you stick to a tried-and-true investment approach, it goes without saying that you will have a better chance of purchasing a property suitable for investment and avoiding a mistake of this kind.
If your finances are not in order
Investing in real estate is primarily a game of money, with some real estate elements tossed in for good measure.
To enter the real estate market, you need to have a secure job, profession, or business that generates a consistent income; you also need to be appealing to banks so that they will lend you money; and finally, you need to have enough cash saved up in a financial cushion to see you through the inevitable stormy weather that lies ahead.
You don’t have enough money
Consider purchasing a money-saving secondary property rather than an investment-grade home in the event that you are unable to afford a primary residence for one of two reasons: you have not set aside enough money for a down payment, or you cannot make the monthly payments on the mortgage. If this is the case, it would be in your best interest to hold off and look for a house that is suitable for investment.
About half of individuals who invest in real estate end up selling their properties within the first five years of their investment. Because of poor returns on their initial investment, around ninety percent of those who put money into the real estate market never acquire more than one property for investment purposes.
In my opinion, fewer than 5 percent of the properties that are currently available on the market are of “investment grade.” This refers to the type of real estate that will outperform the market averages in terms of wealth-producing rates of return and price stability when the markets eventually turn for the worse.
This indicates that you should purchase the appropriate property in the appropriate area (keeping in mind that the appropriate location will be responsible for around 80 percent of your property’s success).
Therefore, if you are unable to pay for this kind of real estate, the best thing to do in such situations is “nothing.”
When you buy real estate, you make your money—not because you get a good deal on it, but because you acquire the correct property.
You’re trying to time the market or find the next hotspot location map house suburb area find
Investing in real estate is mostly a game of money, with some real estate elements tossed in for good measure.
In order to enter the real estate market, you will need to have a secure job, profession, or business that generates a consistent income; you will also need to be appealing to banks so that they will lend you money; and finally, you will need to have enough money saved up in a financial cushion to get you through the inevitable rough patches that lie ahead.
You don’t have enough money
Suppose you can’t afford an investment-grade home, either because you haven’t saved enough for a deposit or because you can’t service the loan repayments. In that case, I believe it’s preferable to wait and purchase an investment-grade property rather than a money-saving secondary property.
Because the first property they buy underperforms and they lose confidence, over 50% of individuals who enter into real estate sell up in the first five years, and the major reason around 90% of investors never acquire more than one investment property.
Only around 5% of the homes now on the market, in my opinion, are “investment grade” — that is, properties that will surpass the market averages with wealth-producing rates of return and price stability when the markets ultimately shift.
This implies you’ll need to acquire the appropriate property in the right place (keep in mind that the right location accounts for around 80% of your property’s performance).
So, if you can’t afford this sort of property, “nothing” is sometimes the best option.
When you acquire a property, you make money not because you bought it inexpensively but because you bought the appropriate property.
You’re attempting to timing the market or locate the next hotspot on a map of the housing suburb area
Sure, property markets go through cycles, and it’d be fantastic to get in on the ground floor or locate the next hotspot, but the landscape is littered with investors who tried and failed to pace the market.
Instead, the best time to acquire real estate is when your finances are in order, and you can afford an investment-grade home.
Remember that Australia has no one property market, therefore, there will always be possibilities.
Instead of waiting to acquire real estate, you buy real estate and then wait.
Purchasing a rental property may be a good financial move for certain people. For example, if you’re in good financial health, have some spare time, and don’t mind dealing with home maintenance difficulties, a person who puts in some patient time picking the right house to rent may make a very nice profit on a rental property.
That group, however, does not include everyone. From the landlord’s perspective, some people may not enjoy the contact between renter and the landlord. Others may not be in a position to invest in a rental property at this time. On the other hand, others may be skeptical of their local real estate market.
That’s OK. If you identify with any of these characteristics, you may still diversify into real estate by purchasing a REIT with part of your investment assets.
The main thing to remember is that renting out houses is only one of many possibilities available to you, and it may be a good fit for you. Consider your financial situation, your abilities, and your hobbies before deciding whether or not renting out a house is the correct option for you.