When you work hard and spend less than you earn, you build savings. But, as financially savvy individuals may know, saving alone is rarely enough to reach a happy and financially secure retirement. In reality, individuals need to build their wealth by investing the money that they save. The core of any long-term investment plan includes things like a balanced portfolio of stocks and bonds and a long-term attitude toward the market. But for those with enough in their savings, other investment opportunities are possible, including investments in real estate.
For most Americans, real estate investment begins and ends with buying their own home, but for those who can afford another property, more possibilities open up. Some may be able to buy an investment property to hold and sell later at a profit or they may even turn that property into a source of income by renting to tenants. Such a property is called, appropriately enough, an “income property.”
Investing in an income property can be a very powerful way to build wealth. But it’s not for everyone, and it won’t work in every case. Here are a few things to consider before you make the decision to buy a rental property.
Do you have the money?
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Buying real estate is expensive, of course. And when you’re looking at potentially investing in an income property, you’ll need more money than just the amount that you would need to buy the real estate.
After all, real estate investments have risks. They can be very successful, but even the safest investments should never be your only investments. If you pool all of your savings to buy one real estate property, then your eggs are all in one basket. On the other hand, if you have enough in cash and assets to buy the property and still enjoy a portfolio that includes stocks, bonds, and perhaps other investments, then you can rest much easier at night.
Is this the right time and place in the market?
More Americans are renting than have in decades. In most areas, the real estate market is looking great for landlords, but you’ll need to do your research and make sure. Is your local real estate market thriving? Might it be overvalued? You’ll have to weigh the possibilities and make your best judgement.
Timing isn’t everything, of course. It helps to buy at the right time, but smart landlords will have a long-term outlook. Income properties are a way to build real, long-term wealth — not just a way to make a quick buck.
It’s impossible to predict everything about the future of the market, of course. If it were possible to do that, real estate investments would be risk-free. The reality is that you’ll always deal with some risk. Your task here is simply to do the research that you can and make your best judgment.
What support and services will you use?
Managing a rental property involves a lot of chores and tasks. You’ll have to keep up with property maintenance and repairs, find the right tenants, check their backgrounds and finances (landlords face few risks greater than that of a problem tenant), and set and collect rent from those tenants. You’ll also need landlord insurance, a lease, and rental applications for tenants to fill out.
The good news is that you as a landlord will not necessarily have to do any of this yourself. There are property management firms to work with on maintenance and repair. There are landlord software solutions that make it easy for you to post your property online, set up an online renters application, and perform a free background check and credit check. Choose the right ways to outsource, and you could save money and increase profits as a new landlord.
Making the decision
Is buying a rental property right for you? Only you can decide that. But if you think about your decision carefully before you buy, you can rest easier at night knowing that your risk is low and your profit potential high.