You have a little money put aside which you would like to invest in something that will increase your wealth, but without incurring a lot of risk. Investing in an income property sounds like a great idea, but is it better than other popular investment options? Would you rather:
- Keep your money in a savings account, which today will earn a whopping 0.05 annual percentage yield. While safe, had you put $1000 in a savings account in 2009, today you’d have about $1004.
- Invest in the stock market, whose value has increased by 356% in the last eight years. Had you invested $1000 in the stock market in 2009, you’d have $3,560 today. Of course, what goes up must come down, so while you might make a lot, it’s always possible the market will plummet the day after you invest your life savings.
- Invest in income property. While the real estate market did take a hit during the 2009 recession, real estate has a long, consistent history of being an excellent and safe investment. Plus, monthly rental income is steady and increases with time.
Like anything, investing in an income property has pros and cons to take into consideration. Here are four of each:
- Interest rates are low, and can be locked in for 30 years. While that major expense stays flat, the property is appreciating in value each year, so even when it’s vacant, you’re making money.
- Renters will provide you with a regular income stream which can be increased every time the lease is renewed. With a static mortgage payment, your net profits will go up every year.
- The market for renters is increasing. Over five million baby boomers are expected to transition to maintenance-free apartment living by 2020.
- The IRS allows huge tax deductions for landlords. Plus, the IRS allows 1031 exchanges, which allow you to sell an income property and not pay any tax on the profit, providing you purchase another income property of greater value. Consequently, you can continue selling and buying better properties without having to pay capital gains tax.
- Maintenance costs on rental property can be high because people don’t treat a rental like they would their own home. Experts say to put aside 10% of the rent for maintenance issues.
- Owning a rental is a business and you’ll need cash for unexpected expenses like lawyers, accountants, and advertising. Plus, you’ll need a cushion for times when the property is vacant. It’s suggested you put 20% of the rent in an emergency fund. If your rental brings in $1,000 per month, $200 needs to go into a contingency fund, in addition to the $100 for maintenance. Unfortunately, if your mortgage is $700 a month, you’re breaking even.
- Property has a high entry cost. You can invest in the stock market with very little money. However, buying property requires a substantial investment, and you’ll probably still have a mortgage payment.
- Finding good tenants is a crapshoot. Those tenants that seemed nice and looked good on paper, may turn out to be screaming, meth-cooking, raccoon-breeding Satanists with anger management issues and lots of guns. Good luck evicting them.
The benefits of owning an income property far outweigh the negatives. Good planning and a solid screening process eliminates most of the problems and can provide a steadily increasing source of income for years. If you’re looking for a good investment, let RJ Homes find the right income property for you.