5 Things to consider before investing in rental income property

Real estate prices are continuing to drop. Foreclosures are still at a high level. Some say to get out of real estate, while others say to get into it. So who is right?

As the cliché goes, it depends. It’s depends on your goals and what you as an investor want to get out of it.

If you are looking for a place to live, then it is indeed a great time to get into it, especially if you have the credit rating to get one.

  • Prices are low
  • interest rates are historically low
  • down payment requirements are not high for first-time home buyers
  • you help protect yourself from inflation

However, what about real estate investing as a source of rental income property? There are quite a few key differences one must consider:

Differences in down payment amount
Most banks and lenders will require at least a 20% down payment for property that will not be your primary residence. There are also plans to raise that to a 25% minimum down payment (if it hasn’t already been raised).

Capital requirements are high and changes buyer tactics
Following the previous point, the capital requirements are pretty steep. There will also be increased competition from all-cash buyers and even FHA buyers. For example, a house that has an asking price of $100,000 would require up to a $25,000 down payment as an investment purchase. An FHA buyer will only be required to put down $3000-4000. Because of this, many times an FHA buyer will agree to higher total costs, such as driving the buying price to $120,000 to push you out, because they can afford the lower down payment. Also, a buyer could easily come in and buy the house at a cheaper price but pay for the entire amount in cash. There is also the consideration of cost of getting a property up to renting condition.

Credit requirements are high
Generally most banks require fairly high credit scores from a person before they allow additional mortgages for investment properties. (725+)

Dealing with tenants
This is the deal-breaker for most when it comes to deciding on investing into income property or not. If you have tenants, you will obviously have to deal with people, and there will come times when confrontation may be necessary. Tenants also tend to care less for a property, so bad tenants can possibly destroy a property. Finding good tenants is key, but also takes hard work and some good luck. There are property management agencies that can find and deal with tenants for you for a price, so that can be an option as well.

Revenue generated will be slow but fairly steady
If you are looking for a lot of money fast, then rental income property is not for you. Depending on how much you spend and how much you are able to charge for rent, it can take up to 5-10 years before you break even. There are also maintenance costs to consider.

Rental income property is a long term investment. In the end if you keep up with it, you will make money, but it is slow and takes time, patience, and energy.

Comments
3 Responses to “5 Things to consider before investing in rental income property”
  1. Corey Ryan says:

    Great post…this depressed real estate market has introduced a lot of hype about acquiring rental income property, but as you pointed out, there are several things that need to be considered. In addition to your five points, the tax code should be considered when making your final decision. Depending on a tax payers circumstances, you may be able to generate positive cash flows while incurring a tax losses to offset ordinary income. This would only occur if the investor is an active participant in income property. Under those circumstances, because of depreciation, you may be able to deduct up to $25,000 in rental losses. If your effective tax rate is 30%, these tax benefits could be as much as $7,500 in additional cash flows.

  2. Peter says:

    The other option to consider in the US is Section 8 property – you still need to deal with tenants of course, but the chances are they should treat the property a little better so they don’t lose their payments.

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