Owning accommodations property in addition to your primary residence can be a way that you should build wealth, especially if you might be averse to investing in the stock market. Data released in 2017 shows that 47% of rentals were owned by individual investors. Theoretically, it seems to seem sensible.
With a rental property, someone else pays your mortgage, and over time your equity develops. You are able to eventually own a physical piece of property outright that also produces income. However, local rental property investments aren’t always a sure thing. The first home my wife and I bought was a condo in 2004 in Stamford, Conn., which we then subsequently rented out whenever we bought our first single-family home. With the great tough economy local rental prices dropped and reduced my expected return, and we also got a couple of months where the property was empty. So, as you can see, things that seem to good to be true often are too.
So, prior to deciding to choose local rental property, consider determining the return on your investment to see if purchasing a rental property is actually the deal you thought. Like any investment, you must understand the expected return on investment (ROI). Before you calculate the true ROI of accommodations property, you have to element in all the costs associated with keeping that property, not the purchase amount just. For illustrative purposes, I’ve come up with a rental property ROI calculation to show how complex this mathematical exercise happens to be.
While the original cost of the investment should be simple (price, closing costs, renovations to obtain it ready), identifying your net profit (income – expenses) can get tricky. Mortgage reduced: How much of the property you own. Financing: In the event that you didn’t buy the property with cash and took out a home loan, per month in primary and interest on the amount you pay. Homeowner’s association dues: Fees you purchase community amenities.
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Property insurance: The insurance you keep on your premises. Property fees: Everything you pay in state and local fees. And remember, each year property fees don’t typically stay the same. They typically continue to rise unless a financial downturn allows you to really have the property reassessed (typically for a fee) and readjusted downward.
Vacancy: The amount of cash you need to cover expenditures when you don’t have a tenant. The standard vacancy rate is 5% to 8%, indicating that’s the percentage of the year that the house can be expected to sit clear. Your time and effort: The one item, many people ignore to take into account is the price of their own time. Whether it’s time spent as the handyman or finding a renter, your time and effort are money, and anytime you put into controlling the property reduces the return on your investment. My “back of the envelope” calculation doesn’t even take into account any management or maintenance costs of the property. Properties require maintenance always.
In addition, every year you anticipate owning the property this calculation should be done for, as your return will change over time. Rental properties can generate income, but the return on investment doesn’t typically happen right away. Rental property investments are also dangerous because of how many variables can affect its performance, like the housing marketplace or your ability to keep it rented. So, if you are thinking if you should invest in real estate, really consider how appropriate this kind of investment would be for you as well as your situation first.
As with any investment, local rental properties should be looked at as a long-term investment, no immediate cash cow. If your goal is to develop wealth, I am going to tell you that we now have other ways to generate a return on your earnings with less risk and headaches, like investing in an internationally varied profile of shares and bonds.
Do you concur that, as an investment, a while is used because of it to reap a reward, or has your experience been different? See Also: I’m a Landlord: Can I Ever Truly Retire? Paul Sydlansky, founder of Lake Road Advisors LLC, spent some time working in the financial services industry for over twenty years.
Prior to founding Lake Road Advisors, Paul proved helpful as relationship manager for a Registered Investment Adviser. Previously, Paul proved helpful at Morgan Stanley in NEW YORK for 13 years. Paul is a CERTIFIED FINANCIAL PLANNER and a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network (XYPN). In 2018 he was called to Investopedia’s Top 100 Financial Advisors list. Comments are suppressed in compliance with industry recommendations. Click to learn more and read more articles from the writer here. And presents wrote This article the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser information with the SEC or with FINRA.