If you already own a principal property and wish to invest in a single rental property, you have come to the right place. We are all about tips and financial advice.
Investing in a rental property usually comes after you already have acquired a residential property. And since you already have invested in a similar asset, the process gets relatively easy for you.
In this post, I have outlined the benefits (reasons) and the challenges of acquiring a single rental property. And in the end, there is a bonus tip for you.
Reason (benefits) of Investing in a Single Rental Property
It is one obvious factor since you already have investment plans and knows what follows an investment; income.
Let’s dig deeper and analyze what if you were to invest in stocks rather than a property. Stocks are, without any doubt, an excellent investing opportunity. You could see them go up and down, predict the best time to buy or sell, and expect dividends.
But investing in stocks better pays off in the longer run, instead of speculating (learn the differences between investing and speculating).
On the other hand, real estate investment is forever. If you buy a rental property, you get monthly rentals (not when it is unoccupied), you have a tangible asset (which is easy to evaluate), could sell it if required (and gain profits as real estate tends to move upwards), and much more.
Protection against inflation
Real estate is a way to manage your pace with inflation; inflation could increase your property’s value and reduce the burden to pay off mortgage debt over the term.
On the other hand, inflation inversely affect stocks and bonds.
Real estate investment also outnumbers the benefits compared with stock investment. First, it is evident that real estate moves in upward directions, and the other is you get a rental income plus your property’s value hike year-over-year.
The key benefit of investing in a property is buying a house from someone else’s money and paying them back in small amounts. In comparison, you do not get much leverage in stock investment.
For instance, imagine if you plan to buy a single-family home in Mississauga and then rent it out. You go to a realtor’s website, find some bungalows for sale in Mississauga, select the best one, and acquire it immediately. Say the property’s price is $1,000,000, you invest only 20% (as a down payment), and the rest settles in mortgage over 15 years. Soon after you have acquired the property, its value goes up by 3%, and you gained a 15% return.
Confused? Your investment was just $200,000 (20% of the total value of the house). The bungalow’s price goes up by 3% (which means the new price is $1,030,000), the profit is $30,000, which is 15% of your investment. So you have earned a 15% profit.
On the other hand, you could make profits with stocks by buying stocks on margin. The rates are higher and are not tax-deductible. Additionally, you could be forced to sell your stocks even when they are low to satisfy a margin call.
That is one significant advantage of investing in real estate. You could cut off costs such as mortgage interest, property taxes, and depreciation from your taxes. And if you incur losses (which rarely happens) from your real estate investment, you could deduct them from other taxes.
Furthermore, you could defer the capital gains from your rental property’s sales proceeds by reinvesting the sum in another property.
And after you pass on this single-rental property to your children as your legacy, they could sell it without paying any tax on the appreciated value during your lifetime.
Since you own this property as a sole owner, it comes under your control and protection. You could renovate the property, upgrade it, and even remodel it and uplift its value.
Of course, you would be required to take permission from relative authorities. But they would not deny your application to make some significant changes to your property (unless it goes against local guidelines and regulations).
On the other hand, stocks are not in your control. The maximum authority you could do is sell them when you have to.
If you intended to look at the b benefits of investing in a single rental property, you need not go beyond here. But if you would like to know the challenges of acquiring a property, you should read on.
Challenges Involved in Buying a Single Rental Property
You need a good credit score
According to Refresh Financial, you need a credit score for a mortgage of 620 or above. If your score is not good enough, your mortgage may not approve, leaving you behind from investing in a property.
For this, you are always required to have a significant credit score. The steps to maintaining a good credit score include:
Pay bills on time:This is the most crucial part of improving your credit history. It is always advised by experts to pay your bills on time to keep a good track record.
Maintain low credit balances: The only way to this is never to reach your credit card limit as provided by your bank. The lower you stay, the better your score would be.
Check credit reports: Keeping a close watch is helpful and will guide you in case of any deviations from your plans to maintaining a significant credit score.
Close unused credit cards: Close any unused credit card and only keep the active cards. This simple step is also an excellent way to improve your credit score.
Have 20% as your down payment
Although the minimum amount you require to pay the down payment is 5%, 20% is recommended by experts. An amount below 20% usually requires you to get mortgage loan insurance. A mortgage loan insurance protects the lender (not you) if you run short in paying your mortgage payments.
20% is a hefty amount to pay as a down payment and requires a lot to save such an immense amount. However, if you can pay this much (or more), you do yourself a favour and reduce either the term period or your mortgage payments.
It is advised that you start budgeting your expenses against your income (if you have not done it already).
Other than the down payment, you would also need to pay the attached fees and charges, including real estate agent’s fee, home inspection fee, repair or renovation expenses, other documentation charges, etc.
Finding a right real estate agent
In some cities, it is not mandatory to buy a house through a real estate professional. But in most cases, you would be required to.
Even where the law does not require it, it is advised to get a licensed real estate agent’s services. They are familiar with the real estate market’s ins and outs, are updated with the current regulations and would be able to guide you on the future of your single rental property.
That leads to the final section of this post; the bonus tip.
Bonus Tip: Choosing Tenants for Your Single Rental Property
Now that you know the benefits and challenges of investing in a single rental property, you need to learn ways to find the best tenant for your expensive house.
Tenant screening services like Zumper, TenantVerification, and Naborly could help you screen your tenants. With these services, you get to know more about your future tenants, including their past and current addresses, trades, score, legal issues, and more.
And if you plan to take this step on your own, make sure the tenant meets these basic common standards:
- Income exceeding the rental amount (3x more than the rental amount is the norm)
- Stable income, with a consistent work history
- Verifiable income (pay slips, bank statements, tax returns, etc.)
- A clear criminal background check
- Satisfactory past rental history
The Bottom Line
After the pandemic situation created last year, it is almost mandatory to have an investment plan. While stock investment is never a good idea, but real estate is a far better option. Plus, it is relatively less risky.
The only way to invest in properties is to have a good credit score, a clear monthly (and yearly) budget plan, and a stable income source.