Is Rental Property a Good Investment?
Real estate has its grip on all of the hype right now. Prices have soared nationwide, mortgage rates are at or near all-time lows, and inflation expectations have been high. This naturally steers investors towards real estate being their next investment. Depending on your stage of life, this may or may not be a good idea.
If you are at or near retirement and you are considering buying a rental property, you really need to think about your goals and what you are trying to achieve with this investment. Most of the time, people are looking for a steady stream of income for the rest of their lives. If this is what you are looking for, you can most likely build this stream of income without buying a rental property by following the asset-liability matching approach.
This will take minimal work on your end if you hire a financial planner that specializes in retirement. A rental property on the other hand will take work. Being a landlord can cause headaches at times, so if you aren’t ready for all of the extra work it takes to make a profit, it is probably best you find an alternative approach to retirement.
For those who have experience in rental properties or are in the accumulation phase, building a rental property portfolio may make sense. Rental property investing provides people a way to build long-term wealth. It is not a get-rich-quick investment. However, if you’re willing to put in the work and have a long-term view, then rental properties could be just what you are looking for.
Cash Flow vs. Appreciation
Know your “why” behind every investment. If you want to build a steady stream of income, then you should focus on cash-flowing properties. Another way people use rental properties is by relying on the appreciation of the property value. They may break even every month with the rental income with a goal of selling the property one day after it has appreciated enough in value. People make it work both ways and a lot of it depends on the location they are investing in. Personally, I like a combination of the two. I would like to see the property cash flowing with the appreciation of it being the cherry on top.
Do your research on how to analyze deals. A great resource is Bigger Pockets. They have hundreds of podcasts, articles, and even a handful of books that will teach you from investors' past mistakes and successes. The main theme is to not cheat your numbers. You need to make sure you factor in future expenses that will come up, like replacing the roof, plumbing, water heater, management fees, etc. Once you have factored in all your expenses, you can calculate an estimated return. Then, compare this to your own required return.
If your estimated return is greater than your required return, then it could be a potential investment to pursue. If it is less than your required return, move on to the next potential deal. If you do your homework and are willing to put in the work, then real estate can be a great way for you to build your wealth. If this sounds like too much of a headache, I suggest you stay away and focus on other investments like passive index funds.
About the Author : Beau Kemp, CFP®
Beau Kemp, CFP® is a financial planner at Sensible Money. He started as an intern while finishing his final semester at Northern Arizona University and has enjoyed seeing the impact a financial plan has on a person’s life ever since.