All of us like the idea of becoming wealthy. If you can build an investment portfolio, or a set of assets that allow you to generate abundant dividends or interest, you can retire early and potentially live a life of luxury.
Of course, becoming wealthy isn’t always easy or straightforward. You could play the lottery, but the odds of winning are quite low. You could just work hard and save your money, but with a modest salary, it might take a while to accumulate substantial savings.
A better option is to snowball your way to wealth using rental property. But how exactly does this strategy work?
The Basics of Rental Property Investing
Rental property investing focuses on acquiring properties you can rent to other tenants. For example, you might buy a new property for $150,000, pay $1,400 a month for general expenses, collect $1,800 a month in rent, and pocket $400 a month as profit.
As long as you keep the property occupied, it should remain profitable for you – and if you buy in a good neighborhood, the value of the property will appreciate at the same time.
If you invest in rental properties aggressively, you can quickly expand your portfolio. Let’s say you make $5,000 a year as a profit from your first rental property. With a down payment of 10 percent and a target purchase price of $150,000, you’ll be ready to buy your next rental property with a down payment of $15,000 in just 3 years. If the second property performs like the first, you’ll be able to buy a third rental property in just 1.5 years. See where this is going?
As you add more properties to your portfolio, you’ll make more money, fueling more purchases in the future. When your portfolio is big enough, you can pull in more than enough to meet your basic needs – and some extra for your own enjoyment. This process may take several years or even a few decades, but if you’re committed, it could really pay off.
The High-Level View
Ultimately, this strategy can work for accumulating wealth. Almost anyone can get involved since anyone with some savings and/or a good credit score can purchase the property. And once you have a rental property management strategy in place, it should be relatively easy to scale.
However, there are important caveats to recognize.
The Risks
Rental property investment isn’t a get-rich-quick scheme. Not everyone who invests in rental property gets rich or even breaks a profit. These risks can stand in the way of your strategy:
- High expenses. In real estate, investors often follow the 1 percent rule; if a property is capable of generating monthly gross rent that exceeds 1 percent of the purchase price of the property, it might be a good investment. If you pay too much for the property, or if the expenses associated with the property eat away at your profits, you may never end up financially ahead enough to purchase a new property.
- Landlord responsibilities. Keep in mind that you have major responsibilities as a landlord. You’ll be responsible for finding new tenants, maintaining the property, addressing emergency repairs, and more. As your portfolio grows, so will your responsibilities; some people find this very difficult to manage, even with a few properties to their name. Hiring a property management company could be the solution to this issue.
- Low tenant demand. If nobody applies to rent your property, it will remain vacant. And if it remains vacant, it won’t make any money. If you have a bad run of low tenant demand, it could cripple your profitability.
- Bad tenants. Bad tenants can also be problematic. If you’re not careful with your screening process, you could end up with a tenant who disrespects the rules of your lease agreement, refuses to pay rent on time, or even physically destroys your property. Fortunately, most bad tenant issues can be avoided with proper screening.
- Major property issues. What happens if the foundation of your property needs major repairs? Or what happens if it turns into a money pit, with dozens of issues that only reveal themselves over time? Insurance may be able to protect you from the biggest catastrophes, but major property issues can compromise your profitability.
- Neighborhood decline. There’s no guarantee that your property value is going to increase. If the neighborhood starts to decline in attractiveness or value, it could cause you to lose money.
- Housing market volatility. The housing market is always fluctuating, and it’s currently more volatile than usual. If you mistime your buying or selling, you could end up in the red.
Key Strategies for Success
Investing in rental property isn’t a guarantee of financial success, but you can mitigate risks with the following strategies:
- Work with pros. Work with experts, especially early on in your investing pursuits. Real estate agents and property managers can help you find more lucrative deals and avoid losing money unnecessarily.
- Be patient. It’s better to wait for the right property or the right tenant rather than rushing into the first available opportunity. Exercise patience as a property investor.
- Diversify. Diversify your portfolio to reduce risk. Invest in properties in different areas – and flesh out your portfolio with other assets and securities.
Always do your due diligence before investing in anything. While rental properties can be profitable, they also demand research and preparation from their investors.
