Many people are looking for ways to add extra income streams to their life. They hope the additional income will push them to the next financial independence level before or during retirement. But in life, everything, including dreams, comes with its trade-offs.
Most popular television shows teach viewers how to cook sumptuous meals, make passive income by trading cryptos, NFTs and stocks, buy a vacation rental property, and much more. But the reality of rental property investment or investing in cryptocurrency, stocks, or mutual funds isn’t as easy as the shows depict.
Investing is a game with rules like any other. You must learn the rules, create a winning strategy and play by them if you want to excel. Waiting to learn on the job because you dived into the property market without proper rental property investment strategies can lead to huge financial losses.
First, invest in knowledge because it pays the best interest. Here are 7 things you need to know before investing in any field, particularly in the property market.
What You Should Know About the Investment
Real estate, crypto, and NFT projects have been trending for quite some time. Newbie investors rushed to put their money into these markets without understanding them. They wanted to make a lot of money easily and quickly. But the hype led to financial havoc.
Savvy investors put their money where they understand. They hire financial advisors to explain to them where to put their money. Experienced investors do not invest in new markets because of the hype or because it sounds cool to do so.
Likewise, you shouldn’t put your money where you don’t understand. You can gather a lot of information on the internet about rental property investment or any other market.
If you’re interested in investing in the property market, here are some topics you can research before committing your money.
- How to make money with rental properties
- How to buy your first rental property
- Are rental properties a good investment?
- How to invest for passive income
- How to find investment properties
- How to buy a rental property
- Investing in a rental property for beginners
- Investing in vacation rental property
You can also take advantage of techvestor.com property market experts and digital investing platforms, and ask them for buying rental property tips. They will help you to create tailored short-term rental strategies.
Rental Property Investments Have No Guarantees
Like any other market, there is no guarantee that you will make money with rental property– it’s risky. Regardless of where you live, the real estate market fluctuates and is often unpredictable. There are also lots of hidden costs, so you need to ask yourself whether it’s worth the risk.
Beginners should consider each potential property and weigh everything carefully. It’s important to understand that the reason for choosing a rental property is to earn income, not because others favor it.
So ask yourself whether you should buy a vacation rental property or invest in apartments. The answers will help you know whether you will generate a decent income or if it’s simply a money pit.
How Much Return to Expect
Conversations between real estate experts and many first-time investors focus on; are rental properties are a good investment, how to invest in apartments or whether to invest in vacation rental property, etc. They ask such questions because they want to figure out whether such investments will generate good income.
After all, the reason for choosing rental property investments over stocks, bonds, NFTs, or cryptos is to make income from it and at a lower risk. Here is the expected passive real estate income when you buy a house worth $100,000.
- The average rent of such a property can be $1,000 per month, depending on the location.
- The expected gross income before deducting expenses is $1,000 x 12 =$12,000. This is 12% of your investment.
- Use the 1% rule to establish whether investing in this rental property is an excellent prospect to generate income. This property brings in a $1,000 gross monthly income which is 1% of your investment. According to this rule, the investment is suitable for generating income.
But the 1% rule is just a guide because one property might satisfy it but fail. After all, there are other aspects of the property that are involved. Therefore the rule should guide but not dictate the decision on whether to buy a rental property or not.
Investing is Risky
All investments, including real estate, have an inherent level of risk. Some people favor real estate over savings accounts, stocks, bonds, mutual funds, and certificates of deposit (CDs) because it appears less risky. However, this top investment is not 100% safe, and you can lose money for the following reasons.
- It’s Unpredictable
During the Covid-19 pandemic, the real estate sector reached an all-time high in some locations, and investors expect it only to move up. As a result, the prediction has attracted many investors who hope to make money from the property market.
The reality is that the property market is unpredictable, and your rental property investment can depreciate anytime. Government policies, Interest rates, political instabilities, the economy, and unforeseen events are some of the factors that influence real estate trends.
- Negative Cash Flows
The price and rental rates can change anytime because the property market keeps fluctuating. As a result, your cash flow or net income after paying your expenses can reduce when you get less income.
You can get negative cash flows because of reasons like:
- A poor rental properties investment strategy
- Charging lower rent
- The high-interest rate on your mortgage and loans
- Costly maintenance
- High vacancy rates
Therefore do thorough research before diving into the property market.
Investing in the stock markets at the wrong time can be dangerous. The market can crash, and you lose your money when it fails to recover. But investing after carefully analyzing the fundamentals can help you create a sound investment strategy.
Investing in real estate follows the same concept as stocks. Blindly investing in vacation rental property over an apartment can be costly. You need to consider the property location because the return depends on factors such as:
- Basic amenities
- Roads and other infrastructures
- The crime rates
- The neighborhood, such as the availability of other rental properties
You need an Emergency Fund
People make outsized returns when they hold their assets for a longer period. Such investors don’t liquidate their investments when they face a financial crisis because they have an emergency fund.
Truthfully, it takes longer to turn a rental property investment into money, especially when you have an emergency and have other dependents depending on your income. Maintaining an emergency fund account can protect when unexpected events occur.
Building an emergency fund because asking where to buy rental property is prudent. The fund will be the source of refuge in hard times. You may land in a financial emergency before your investment starts to generate income which can halt your investment journey at the early stage.
Diversification helps to preserve your wealth. Building a concentrated portfolio can help you build wealth. Therefore consider putting your money in investments that you’re bullish about. Whether a newbie or a seasoned investor, you need to spread your wings widely but narrowly to make money.
Make a list of six wonderful businesses you understand and want to invest in. Alternatively, invest in different properties such as residential, commercial, vacation properties, etc. The rule of thumb is not to put all your money in a single investment. Having more than one investment can help you in case of an unforeseen event because markets respond to crises differently.
The Bottom Line
Wise people learn from other people’s experiences but fool from their personal experiences. Throughout the decade, people have considered the property market a sound investment. Indeed savvy investors have built wealth and enjoyed excellent returns and tax advantages from their rental property investment.
The article has highlighted the 7 things you need to know before investing in all markets, including real estate. These tips can help you when you decide to buy a rental property, stocks, bonds, and others. Indeed with some careful planning and a little forethought, you can earn outsized returns from your rental property investment.