22 Tips when Investing in Australian Property
Property is one of the most popular investment options in Australia and a great way to build your wealth. However, it's a long-term commitment that isn't for everyone. Consider the following benefits and risks to help decide if it's the right option for you.
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Consider the options
Have you given any thought to remodeling your current residence or researching the possibility of obtaining a top-up mortgage in order to convert it into an investment property?
Advantages of real estate investment:
- Property is a long-term investment that is comparatively safe.
- It's a reliable and obvious asset.
- A rental income from an investment property may be used to pay for loan payments and other costs.
- You could eventually sell it and earn capital gains.
- Increasing your investment's equity You can add more investments to your portfolio thanks to a house loan.
- Taxation and gearing might result in significant financial gains.
- Rent revenue can be used to offset costs associated with the investment property, and you might be able to deduct the value of items like furniture, carpeting, and white goods.
- If you already have other investments like cash, shares, or managed funds, investing in real estate may be a great way to diversify your portfolio and lower your risk.
Understanding the risks
There may be dangers with this investment, just like any other. It's possible that the rental income won't live up to your expectations or that the property's value may drop. You might not have immediate access to your money and might get better returns on a different kind of investment. Find out if purchasing an investment property is right for you by speaking with a loan expert.
Can You Afford an Investment Property?
You purchased your first home and gradually paid down the mortgage; today, though, the value of your home has increased. You're beginning to question if you can afford an investment property since you're starting to feel a little more secure financially.
Finding the answer to this question generates a number of intriguing issues that might help you choose whether or not this strategy is right for you.
From the standpoint of financial planning
For many people, determining whether they can afford an investment property may require first determining their priorities.
- What makes me desire to purchase a rental property?
- What role does this play in my long-term financial plan?
- Which kind of investment property am I looking for: one with high rental yields or one I can sell for a profit in five or 10 years?
- Do I want a property that I can rent out right now or do I want to renovate it to increase its value?
- Should I purchase a home or an apartment?
- What will the interest rate be on my loan for a rental property?
All of these inquiries will assist you in developing your plan of action and bringing you one step closer to determining whether you can actually afford the kind of investment property that works with your long-term strategy.
From a practical perspective
The following is a list of costs you should be aware of if you decide to become a real estate investor:
Deposit. You typically require a deposit equal to 20% of the property's value if you wish to avoid paying lenders mortgage insurance (LMI) fees. You may be able to get a mortgage with a loan-to-value ratio (LVR) as high as 95 percent, meaning you'll need a lesser down payment if you shop around and compare deals.
Home loan. There are additional fees related to your loan in addition to the principal that you borrow. As well as legal fees, valuation fees, and monthly or yearly fees, there are setup and application costs to take into account. Along with recurring interest payments on the amount you borrow, LMI can be an expensive charge if your deposit is less than 20%. Read the fine print when applying for a house loan because a variety of additional costs can be included.
Purchase costs. You'll need to take into account other expenses that come with the purchase. This includes stamp duty, the cost of which is determined by the cost of the property and varies from state to state. The price of an attorney or conveyancer, registration costs, and the cost of the legal transfer of ownership ($650–$850) must all be taken into account. Before the sale of the property closes, building and pest inspections will also need to be done, which might increase your costs by $500–$1,000. Another extra charge is title searches.
Buyer's agent fees. Buyer's agents are being used by more and more investors to aid in the search for and acquisition of the ideal property. You'll need to account for your agent's costs in calculations if you decide to take this course. Buyer's agents typically charge a fixed fee of between $5,000 and $15,000 or a fee that is 1-2 percent of the buying price of the property.
Insurance. Building insurance can shield your rental property from a variety of threats, including fire, storms, theft, and others. In addition, landlord insurance offers protection in case a renter fails to pay their rent or damages your property. The price of this form of protection is influenced by a number of variables. These elements include the property's size, the materials utilized in its construction, and the location of the land.
Property management fees. If you have the time and resources, you can manage your rental property yourself, but most individuals choose to hire a professional property manager to take care of their investment property. Property managers handle chores like finding and vetting renters, hosting open houses, and planning any necessary repairs or maintenance. Property management costs typically range from 7 to 10 percent of your monthly rent.
Repairs and maintenance. Your home might require repairs at some point. There will be leaky faucets, replacement fittings and fixtures, and certain parts of the house or apartment will just stop working from normal wear and strain. You should be prepared to cover the expense of any upkeep and repairs that the property requires. You might need to hire plumbers, electricians, builders, and a variety of other trades to keep your house in top condition. Because parts are less prone to break down on newer properties, repair and maintenance costs are typically lower.
Strata fees. You'll have ongoing body corporate costs if you purchase a townhouse or a unit. These costs change based on the size and kind of the building, where it is located, and its features. They are used to pay for building insurance and expenses related to maintaining common areas. Before you decide to purchase a house, don't forget to look into the strata fees you'll have to pay.
Council rates. To get the typical quarterly rates for a property of your size in the neighbourhood, contact the local council. To help you determine the potential return on your investment, include this sum in your budget.
Other expenses Depending on your situation, other expenses you might need to take into account include:
- Accountant's fees to assist with tax return preparation and rental income and expense calculation
- The cost of pest control
- expenses made when a tenant vacates a property and you have to locate a replacement
- Renovation expenses if your property needs to be updated to improve its "livability" and appeal to potential tenants
- If you need to travel to check on your property or supervise maintenance, travel and lodging costs
- Land tax on your investment property that you must pay to the government
- The price of securing tenants and securing the necessary utilities and services for your property
- fees for agents, attorneys, advertising, and other charges to keep the property in top shape
From the viewpoint of the bank
You need to determine whether the bank believes you can afford an investment property once you've determined that an investment strategy is a wonderful concept to progress your long-term financial goal and you feel you can afford your mortgage and costs without it negatively affecting your lifestyle.
Australia continues to favour purchasing investment properties as a means of investing. Gaining wealth and ensuring your financial future should be the goals of purchasing an investment property. However, a frequent misperception is that investing in real estate always yields profits; while this is generally true, it isn't a quick path to wealth. It's important to remember that how well you manage your investment will influence whether or not it enables you to achieve your financial objectives. When you include in your potential rental income and tax breaks, the cost of owning an investment property might be surprisingly inexpensive.
Property market investing can offer numerous opportunities for profit, but it can also be risky due to information overload.
Even if they've previously bought a house, a homeowner may find themselves in uncharted territory when buying an investment property.
In contrast to your permanent house, an investment can offer you a consistent rental income over time in addition to the benefits of capital growth. And don't forget that there are several ways to invest in the market and make money.
Investors must have a proactive mindset; they must be willing to learn how to make their money work hard and take the time to comprehend and evaluate their financial possibilities. The key is having the ability to purchase below market value and then add value. It is important to invest in real estate that will generate a sufficient amount of cash flow without affecting your after-tax cash flow or your way of life.
The stakes are enormous when buying your first investment property, just like when buying a home, and there are a number of other important variables that will affect how much money you make. But how can you tell if you're prepared to make an investment? And how much money or equity must you have on hand before you can start?
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What financial goals do you have?
The largest error people make when discussing investment properties is that they lack a clear understanding of their financial goals. People generally want to make enough money to be wealthy or financially independent, but they are unsure of the specifics of what that entails. In other words, they don't have a set amount they need to earn in passive income to be able to leave their day job and continue to live comfortably while their investments grow.
Okay, so what financial goals do you have? Write out your goals without making them too convoluted as you sit down. I've discovered that the simplest approach to do this is to think about your salary and whether you can currently support yourself on it. If so, you can set that as your financial objective and make the necessary adjustments.
Selecting the ideal residence at the ideal cost
Choosing a property that is more likely to appreciate in value is the most important choice you will make because real estate investing is typically all about capital growth. For this reason, it's crucial to purchase at the right price.
Real estate is more difficult to price than shares, where a company's value is clear. If you are persistent and competent, though, you may be able to purchase an asset for less than its true market value. The key for you is to do your homework, figure out what's selling for in the neighbourhood, and after that, you'll find that you'll get very good at estimating a property's value - you'll know a deal when you see it. Never buy property in an area you are unfamiliar with, especially if a real estate salesperson approaches you about buying an interstate or offshore property. Since many of these real estate marketing businesses are paid very high commissions, the price of the property is sometimes greatly inflated. We advise getting in touch with another lender or us to set up an independent appraisal on behalf of a bank if you locate a house you like but are unsure of its true value. Once you have this knowledge, you may frequently utilize it as a powerful negotiating tool.
You probably aren't aware of this, but mortgage insurers and lenders have useful information on various areas and real estate developments. You should try to get access to this data to help you avoid choosing the incorrect investment property. Whatever you do, never choose to purchase an investment property based on obtaining a tax benefit; instead, always put an emphasis on selecting the appropriate investment.
Purchasing a property to live on and plan to develop as your primary residence is different from purchasing a property to be used as an investment. When picking the kind of property (a house, an apartment, or a duplex) and the location (a city or a suburb), you must employ different factors. Finding a home that will appreciate in value at the correct price is essential because investing in real estate is all about capital growth.
If this takes longer than you anticipated, don't be shocked. Utilize websites like Australian Property Monitors to learn about the potential growth of various suburbs. If you're considering an interstate purchase, make sure to conduct a first-hand reconnaissance because those glitzy real estate brochures and websites frequently exaggerate the prominence, cleanliness, and openness of the neighbourhood or buildings.
- regions with strong rental income relative to property values
- and previous sale prices to give you a sense of how much a property is worth.
- rates of vacant properties in the area. Consult some real estate brokers in your area regarding rental openings.
- Are there any new zoning changes or developments that could have a good or negative impact on the region's real estate prices according to council or government plans?
- proximities to transportation, schools, hospitals, and commercial centers are among the neighborhood amenities
- anticipated costs of property maintenance
- Layouts and features of the home, such as the number of bedrooms, baths, and outdoor space.
Making sure you have a consistent rental income stream is also essential because it will lower the cost of holding the asset and generate money.
Home units, houses, and land are examples of residential property types that can perform better than one another over time. For instance, if vacant land is purchased in a location with a low supply, it may appreciate more quickly even though it won't generate any rental income. Buying a housing unit instead of a freestanding weatherboard house may result in lower maintenance costs. Higher rental returns are available in some places, but you must do your research because these properties frequently offer fewer prospects for capital growth.
Additionally, it is crucial that your rental property fits the local rental market's demographics. For instance, if it is close to a university, more bedrooms will be desired over a large backyard for children to play in. A family house on a quiet street near parks and schools will be more sought-after than one on a busy route.
Make your calculations; cash flow is always king.
Property investment has been shown to lead to long-term wealth. You should still view it as a medium- to long-term investment, so you need to be sure you can continue making your mortgage payments over the long haul. If you were to experience financial difficulties, this might compel you to sell the property at the incorrect moment. You won't want to have to sell your investment property until you are prepared and ready.
Once you own an investment property, maintaining it and paying off the loan can be relatively affordable because you earn rent, get a tax credit for many expenses related to ownership, and remember that over time, rentals tend to rise along with your income, so you can anticipate things to get simpler.
Here is an illustration of what owning an investment property may cost you. We advise you to consider the loan servicing costs after taxes so that you can put the cost in actual terms for yourself.
Property Purchase Price: $50000 $20k for stamp duty and additional expenses Borrowed Amount: $520,000 $450 per week was received as rental income.
Continuous Costs Interest expense @ 5.00% p.a. : $26,000 Rates: $1,500 Tax on Land: $804.00 (Calculate your land tax in NSWexternalLink ) Agents' Fee at 7%: $1,638 $500 insurance
Costs in total: $30,422 Less Rent: $23,400 (450 dollars x 52 weeks). Annual Deficit: $7,022 Lesser tax break: $3,160 (assuming a tax rate of 45 percent ) $3,862 per year after taxes, which works out to $74.26 each week.
In conclusion, the example shows that the expense of maintaining this rental property comes out to only $75 a week. I like to express that expense in a way that makes sense to me, so the cost of owning this investment property might be a tank of gas or a few great bottles of wine.
Be mindful of the taxes that come with investing in real estate, and include them in your calculations. Since these can vary over time, advice from a qualified property tax accountant is crucial in this situation. Land Tax, Stamp Duty, and Capital Gains Tax must all be considered. While it's important to keep in mind that interest rates might change over time, the good news for real estate investors is that you can normally anticipate being able to raise the rent during periods of rising interest rates.
Additionally, you should be aware that banks only consider 80% of the rental revenue when determining whether you can afford an investment loan. This is because you will pay expenses like vacancy rates and letting fees; think of this as a general rule of thumb for you as well. You can get in touch with us if you need assistance calculating the cost of maintaining an investment property.
Calculating how many banks will lend to you is crucial. The majority of you will be in a position where you have a job that you have held for a number of years, therefore it is likely that the banks will provide you with a loan. But before you start looking at properties, you need also consider how much they're going to loan you.
Has a cash flow analysis been performed?
This is significant because occasionally people fail to take into account the various costs that must be considered:
- Manager fees for rentals
- Insurance payments
- government fees
- perhaps body corporate costs
- costs for an upkeep if you buy a condo or townhouse
You must conduct analysis because you must pay for a variety of various things. Calculate your total revenue vs all of your expenses, as well as how much it will probably cost you each week, month, and year.
How many properties are you planning to buy?
You might consider purchasing a single property for your entire financing capacity. However, perhaps a better approach would be to use the deposit you have saved and your available borrowing capacity to purchase two or perhaps three far less expensive residences. You are not placing all of your eggs in one basket in this manner.
Your investing plan and level of activity as an investor will determine how many properties you decide to purchase. Just keep in mind that you'll probably need numerous properties if you want to be financially free. Even if you might not purchase several residences at once, you should think about doing so in the future.
Which investment approach will you employ?
There are numerous ways to invest, including:
- Possibility of positive cash flow (which I talk about a lot)
- Negative gearing to increase capital
- Make improvements to increase value
- Divvy up a property
- Make bigger advancements
- Purchase and hold
- buy units
You need to determine which investment strategy you believe suits you best because there are numerous options available when investing in real estate.
Find competent property management, then let them handle it
The responsibility of a property manager is to maintain things for you and your tenant. A property manager is typically a licensed real estate agent who is an expert in their sector. The competent agency will let you know when you should evaluate rentals and when you shouldn't. They can provide you with continuing guidance, assist you to manage your renters, and help you get the best value from your property.
The property manager needs to be able to provide you with information on real estate legislation, your rights and obligations as a landlord, as well as those of the renter. They'll also take care of any maintenance difficulties, but you must first approve all expenses (apart from some urgent repairs).
The property manager will also assist you in finding the ideal tenant, checking references, and ensuring rent is paid on time. Tenants have legal rights, so you must constantly attempt to respect them and refrain from interfering with them excessively. Although you should always go via your agent and offer plenty of notice, you should do routine independent inspections of your property to ensure that the tenant is protecting your investment.
The good news is that the fee you pay your managing agent is often a percentage of the rent paid, is subtracted from the lease, and is deductible for tax purposes.
Recognize the dynamics of the market where you are purchasing
You can understand whether one side of a street is prefered over the other by talking to as many individuals as possible, including real estate specialists. Take into consideration the other homes that are located in the area. I usually make sure to inform competing real estate agents that I am thinking about purchasing a different home that is comparable so that I can hear what they have to say; this is an excellent strategy for gathering valuable inside information. Make sure to do some study on the topic and have conversations with reputable specialists. If you acquire information from a source like RP Data, you will have access to data that is objective and can provide you with information on typical rental rates, property values, demographics, and reports on suburbs.
You can discover a lot of information online; but, if you are serious about investing in the coming year and want to chat with me on the phone, we can begin by trading free RP data reports. If you are serious about investing, you can find a lot of information online.
Finding out about potential changes that could occur in your suburb is another good approach, and the neighbourhood council is often able to provide assistance in this endeavour. For example, if there is a large construction project going on next to your property, it may be more difficult for you to rent it out at an appropriate price. On the other hand, if there was a planned by-pass in the area, there would be less traffic, which would result in an increase in the value of your property more quickly than you might have anticipated.
Choose a mortgage that is best for you
When it comes to financing your investment property, there are a variety of options available, therefore it is important to consult an experienced advisor on this topic because it has the potential to have a significant impact on your overall financial well-being. It is remarkable how many people waste too much time researching mortgages in an effort to save a few dollars per month when they might be researching the real estate market in their local area, where they could make significantly larger returns. I've seen bright people haggle ferociously with a lender over a few dollars a month on their mortgage, only to overpay for a home at auction by a factor of one hundred thousand dollars.
Because not all costs associated with borrowing are immediately deducted from taxable income, it is necessary to be aware of the distinction between the types of costs involved in borrowing. Your loan must have an appropriate structure, and you should seek the advice of an established financial professional to accomplish this task. I usually make an effort to keep home mortgages and loans for investment properties separate wherever possible. This helps me maximise the long-term tax benefits I receive and minimise the costs associated with maintaining my books.
Your circumstances will determine whether you choose a loan with a fixed rate or a loan with a variable rate; nevertheless, before making a decision, you should give careful consideration to both of your available options. Although variable rates have historically been found to be the more cost-effective option, there are circumstances in which it may be beneficial to select a loan with a set rate of interest. Keep in mind that rates almost always go up in concert with the growth in the price of real estate. Since real estate investors have likely been successful in terms of capital gains, rising interest rates are not always a bad thing for them all of the time.
Because doing so increases the tax efficiency of your investment, the vast majority of loans for investments should be structured as interest alone (rather than principal and interest) rather than principal and interest. If you currently have a mortgage, it is imperative that you make an effort to and plan for some degree of flexibility. Investment properties are good candidates for Interest Only loans because the negative gearing effect of Principal and Interest loans lessens as the balance of the loan is paid down. Consider giving some careful consideration to obtaining an investment loan that comes with either an offset account or the choice to pay the interest on the loan in advance.
Utilize the equity in a different property
An efficient strategy to purchase an investment property is by leveraging the equity in your primary residence or another property investment. Your home's equity is the sum of money you actually own. You may figure it out by calculating the difference between the value of your home and the amount of your mortgage. For instance, if your house is currently worth $750,000 and your mortgage balance is $250,000, you have $500,000 in equity. Additionally, you may be able to borrow more money against your investment property by using the equity in your current house, which would enhance your tax deductions.
If the cost of the investment exceeds the income it generates, negative gearing may be able to provide property investors with specific tax advantages. According to Australian legislation, you are able to deduct property-related borrowing and maintenance expenses from your gross income. However, in order to receive a tax benefit, you must first generate other taxable income. The benefit of this is that even though you are losing money on the property, the loss may be used to pay less tax on your other income. To earn a tax deduction, don't purchase an investment property though.
Will you purchase new ones or used ones?
Benefits can be found in both. If you're a first-time home buyer, you may be eligible for subsidies or reductions in some states to help you break into the market. They might even cancel your stamp duty or give you money to go toward it. Purchasing new also allows you to design a home specifically for that market and receive significant depreciation as it is a brand-new building.
I can't offer advice on that, therefore talk to your accountant about your alternatives.
New properties can be great, but you should exercise caution if you buy one through a real estate marketing firm because they do add commissions on top. Find out the commission rates and estimate the property's future value after construction. Before moving ahead, speak with local real estate brokers.
Examine the infrastructure's age and condition
Even with negative gearing, having to replace the hot water heater or roof within the first few months of ownership might significantly reduce your profits and negatively impact your cash flow.
Therefore, it is advised to hire a qualified building inspector to do a complete assessment of the property to identify any potential issues before you buy (and then once a year after that).
Use a qualified tradesperson who is insured adequately to protect you from subpar work and who is licensed to perform the task.
Purchasing a house that needs work isn't always a terrible idea because you can increase the property's worth by making improvements, which can boost your returns on both capital growth and rental income. Now, when you purchase shares, you cannot do that.
Which kind of property are you planning to purchase?
We must first consider buying flats. You will incur additional expenses for a unit known as strata or body corporate fees. These fees might be annoying since they drain your cash flow and give you very little power over what happens. There will be tenants residing in and owners of the other units while you are an investor. These folks will use the money differently than an investor who only owns the apartment because they actually reside there.
When you buy a unit, you risk losing a lot of control over your spending. But when buying a house, there are other factors to take into account. Just make sure you do your homework and choose a quality type of property before investing.
Which area will you buy?
You can't just look at a number of houses throughout the nation and hope to find anything that will be a good investment. I frequently receive letters from people who claim that a property is being discounted for a variety of reasons and that they believe it to be a fantastic opportunity. However, they don't research the market before investing. It's not always a good idea to invest in a location just because it says on the property that it's cheap. The asset could not even be discounted. It's likely that you are receiving it at market value because the sellers didn't ask for enough.
To determine whether the region you wish to purchase in will be a wise investment, you must conduct a study on it. Buying a Residex report is one way you could go about doing this. Utilizing the census to learn about the population and economy is another technique.
Simply choosing a location to invest in is another option. It need not be where you reside because just because you wish to live somewhere doesn't necessarily mean that it is a good place to make investments. Always look outside and base your decision on the area's potential for growth and your financial goals.
How many vacancies are there?
It's crucial to keep in mind that just because a property has a high rental yield, it doesn't guarantee that tenants will stay there all year. It's crucial to keep in mind this while renting to students. If you rent a place specifically for a university, keep in mind that students only arrive in March and that universities are closed in the months of December, January, and February.
Serious cash flow problems can result from not having the property rented out for the entire year, which will lower your yield over the course of the year.
Make the house appealing to tenants
Keep the kitchen and bathroom in good condition and stick to neutral colours. If your house is well-presented, you'll discover that you'll draw in higher calibre tenants, and the last thing you want is a bad tenant.
The question of whether you should purchase a home that you'd be content to live in yourself is another hotly contested topic. Some individuals think this will make it more appreciated, while others don't give a damn. To avoid getting too engaged, try to distinguish between your personal house and your investment; keep in mind that this is your tenant's, not your own, home.
I think it's important to keep in mind that the time will come when you'll want to sell the house. A home will have a larger market if it appeals to both owner-occupiers and real estate investors, which will increase the selling price. Owner-occupiers, in my opinion, are more inclined to pay a little bit more for the ideal property since it becomes an emotive decision rather than a rational one.
Consider the long term and manage your risks
Keep in mind that buying real estate is a long-term investment, so you shouldn't count on the value of your house to increase right away. Try not to get too greedy and strike the correct balance between financial stability and still being able to enjoy life. The longer you can afford to devote to home, the better. As you develop equity, then you can consider buying a second investment property. Although having a secure financial future is important, life is more than just math.
Remember that you cannot simply sell a portion of your investment property if you need money, unlike shares or managed funds. Be cautious, but remember that record migration rates and a lack of rental homes are important factors encouraging real estate investment.
Are you willing to get your hands dirty?
Do you want to own real estate and be a passive investor who doesn't have to do anything, or are you willing to be an active investor? You should invest in something where you can add value if you're going to get your hands dirty and actively manage your portfolio.
Getting your hands dirty doesn't necessarily mean carrying out the remodelling yourself. Buying a property that you intend to subdivide and working with town planners to plan the subdivision and have everything approved by the council could be involved.
Depending on what kind of investor you want to be, you purchase various properties. An active investor would purchase a home that needs work done, whereas a passive investor wouldn't because they would both need to be actively involved. They can and want to do it, after all.
Can you afford a financial loss?
Let's face it, not all properties will be a home run. You're going to purchase some worthless homes. And your chances of making a mistake and losing money are substantially higher if you're a novice investor who has never bought an investment property.
If you can't afford to lose money, you should think twice about whether investing is even a good idea. If things don't work out, you can end up going bankrupt or losing your home. Consider the advantages and disadvantages, as well as the worst-case scenario and your plan of action.
Are the payments affordable to you?
What would happen if your property wasn't rented for a long time, regardless of whether it would be adversely or favourably geared? Even if everything goes according to plan, could you still afford the payments?
Do you have a plan for leaving?
What will you do after everything is said and done? By having an exit strategy, you can sell a home for a profit and move on to other investments.
You can choose to sell your property after a set time to access your money because you don't have to buy it and own it forever. You can benefit in the long run by planning your exit strategy before you even buy an investment property.
Risk vs. Reward
Every financial choice involves balancing the benefits and the risks in order to determine the return. Do you think it's a good idea to invest in real estate?
- You receive passive income. In addition to the initial investment and ongoing expenses, you can make money by focusing the majority of your time and effort on your normal employment.
- Your earnings ought to rise. In addition to receiving rental income, your investment grows in value as real estate prices rise.
- Real estate can be included in a self-directed IRA.
- Your taxable income for Social Security purposes does not include rental income.
- You can deduct the interest you pay on a loan for investment property.
- Real estate values are more steady than stock market values barring another crisis.
- An actual asset is a real estate. There is nothing tangible about investing in stocks or Wall Street goods.
- Even though rental income is passive, managing renters can be difficult if you don't hire a property management firm.
- If your adjusted gross income is more than $200,000 (single filers) or $250,000 (joint filers), you may be subject to an additional surtax of 3.8% on any nett investment income, which includes income from rentals (married filers jointly).
- It's possible that rental income won't cover the entire mortgage.
- If the markets turn bad, you can't sell real estate right away like you can with stocks.
- Costs of entry and exit may be substantial.
- You are responsible for all costs if there is no tenant.
The Bottom Line
Be reasonable with your expectations. Like any investment, buying rental property won't immediately result in a sizable monthly income, and making the wrong choice could have disastrous consequences.
On your first property, think about partnering with a seasoned partner or renting out your own house to assess your landlord's skills.