eAs the world tries to recover from the recent economic crisis, there's a big question on everyone's minds: “What is next?” One area of focus is on how to invest in property. In difficult times, rental properties seem like one way for people to profit from their rental property investment.
But now that the economy has rebounded somewhat, what's changed? What are some things for people to consider before making any rental property investments? And what kind of return on investment can they expect when renting out properties?
This post will answer these and other questions about investing in rental properties today. If you want more information about this topic, then head over to this blog to read more.
What Are Rental Properties?
The term “rental property” is one that's a pretty broad definition, meaning it could refer to a variety of different types of properties. The most common rental property is, of course, an apartment complex for long-term renters. But rental properties can also be multi-family homes, small single-family homes, condos, or even large commercial buildings. These are all generally rented out by individuals who do not live in the building and/or who do not own the property but contract to rent it for a set period of time.
The benefits of owning a rental property include greater predictability and control than you may have with other investments. It's also got the potential to be a great return on investment because it can be quite profitable when done right. But the risks in renting out a property are similar to those of many other investments. You could lose money, but with enough hard work and research, you can make money with rental properties, too.
What It All Means for Investors Today
So what does all of this mean for investors today? How is the economy today affecting real estate in general? And what should people who want to invest in rental properties do? What are some things they should keep in mind? That's what we'll take a look at over this article. But first, let's take a look at what's been happening in the rental market in the last several years.
The Ten Year Decline
The housing market had been showing signs of improvement for several years, but in 2008 the bottom finally fell out. In fact, according to the US Department of Housing and Urban Development (HUD), the average household spent 50 percent less on housing than they did during the period from 1975 to 2005. In a typical year, we might expect our spending on housing to increase by about 5 percent from year to year. Since 2008, that has dropped more than 75 percent.
These numbers don't include rent prices, however. To try and cover the difference in housing costs, many people have increased their rents in recent years. From 2005 to 2015 rents rose by a whopping 30 percent. We can see this more starkly when we look at the average monthly costs of living in various states over that 10-year timespan:
These statistics only represent a small segment of the population, however – namely, the top 20 percent by income group. And as we might expect, this is a group that's fared far better than those lower on the food chain.
Rent Expectations
When it comes to renting expectations, there are a few different ways people decide how much they'll charge for their property. Typically, a good real estate investor will do everything they can to get the most rent possible. But others may charge less out of mere necessity or because they're feeling benevolent that month. And some people will even try to make money by sub-leasing properties – essentially taking in one person's rent and giving some back to them in exchange for free rent – but this is more of a risk than anything else.
Leaving aside these exceptions, the average monthly cost of living is just $937 (as per HUD). If we assume that this average person will charge enough to cover their costs, then the real estate investor is still likely to be in the black. But it's important to remember that this doesn't include the costs of other expenses.
Income requirements for rental property investors are pretty high though. If you plan on doing this, then your monthly income needs can range anywhere from $3,000 a month up to $4,000 a month. The higher end of that range is for people who charge enough to cover everything and don't have any other expenses. But if you run a little bit below that price point or make some money off sub-leasing, then your financial situation could get more complicated than you expected.
What is important to remember is that the income requirements in rental properties are lower than many other types of investments. This is a good thing for people who are just starting out. Someone with $1,400 a month could potentially invest in single-family homes. But it's also important to keep an eye on your cash flow and expenses so you don't get into trouble with your debt to income ratio.
The Big Picture: Are We Heading for Another Recession?
The last few years have been rocky for investors, but it looks like the worst is over. The economy has recovered sufficiently from the recession that we're not looking at another one right around the corner – although there's always the possibility, of course. And while things are looking up, it's still a good idea to be careful and keep your financial situation stable.
Saddled with a mountain of debt, many people stopped investing in their homes after the 2006 recession. Since then, US housing prices have been steadily rising – even if they're nothing compared to the insane growth we saw before. As a result of this pent-up demand, home sales have actually been increasing over the last several years. In fact, this past February was one of the strongest months for real estate sales in almost six years.
But rising prices have taken their toll on rental properties. For a good while, the average price per square foot for residential rentals in the US had been rising steadily at about 5 percent per year. But beginning in 2011 it began to level out at around 3 percent per year. This has kept the cost of your typical rental down and allowed you to get more profit from each of them, but it's also contributed to some poor management decisions – namely, the decision to buy fewer properties than would be necessary for you to be able to cover your costs with a healthy monthly income.
Not every investor will need ten houses and two apartments in order to make money. But it's important to remember that there are a lot of costs that don't just disappear if you want to make money off real estate. Whether it be taxed, insurance, repairs, or maintenance, there are a lot of expenses you need to account for when you're an investor. You can get some help with this by signing up for free online tax software – just click on this page and take a look at what's out there.
Debt is Another Big Problem
Nowadays, we have more debt than we did before the recession hit. The total amount of household debt in America is $13 trillion – enough to buy 1,000 Nissan Versas or 628 million iPhone 5s in cash. If the average American had to pay off all of their debt, it would take them 2.9 million years. Even worse – now that interest rates are going up, all of this debt is becoming more expensive.
If you're thinking of getting a mortgage, then you need to think about whether or not you can pay it off before the loan matures. In many cases, you'll have to come up with money from another source if you want to be able to pay it off right away – otherwise, it's going to turn into a balloon loan and you're going to have even more trouble paying it back than usual when that time comes.
This is what rental property investment really looks like.
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