Dear Claire: Are Rentals Good Real Estate Investments?
The Realities of Rental Property Investment
As a rule, rental properties are a complicated subject. There are books written on this topic. I’m probably not going to be able to give you everything you need to know; however, I can give you some real short sort of teasers. If you do think that you want to invest in a rental property, you should reach out to a professional. I would be included in that list, for sure.
An investment property is just like investing in the stock market. Accept it. It’s the real thing. And because it’s a real thing, it needs maintenance and care. Also, having tenants involves time and effort on your part to coordinate and make sure the investment property is well maintained. Other things must also be taken care of and followed up on, such as ensuring leases are accurate and up to date.
Therefore, it’s not a set-it-and-forget-it kind of a thing. You’ll need to invest time and effort in the rental property on a regular basis. It is one of the only ways you can leverage your money vs. just putting money in the stock market.
Say I have $10,000 to invest in the stock market. In this market, you would not be able to buy an investment property for $10,000 as any investment property requires at least 25% down. So that’s going to make it a little bit more expensive. But if I invest $10,000 in the stock market, I get $10,000 worth of stock, right? That makes sense.
If I invest, say $120,000 into the real estate market, typically I’m getting $150,000 back on my investment. So, the rate of appreciation is on the $150,000, not $120,000, which makes a difference. Over time, things appreciate and usually stocks and real estate tend to appreciate based on data from the last 100 years. At about 5%, year over year, they perform about the same as the S&P 500. So, as things appreciate, you’re usually going to be looking at about 5% year-over-year and that in the long run could be a good retirement investment for you.
In the city of Portland, Oregon, there are a lot of laws governing agreements with tenants. If you want to be well-informed, you should hire a property management company that is going to do a good job maintaining and finding you tenants and making sure that the contracts are up to date and current. Then, you’re going to want to maintain the rental property. Like any property purchase, there will be a time where you get to do all the inspections on the property. A bunch of stuff will come up because it always does. For example, there could be a hot water heater or a part on the furnace hasn’t been replaced in 35 years that will need fixing. All these things will be super useful to know, especially if you rent and have an investment property because you’re going to need to plan in advance for when you’re going to replace those things. The hot water heater, for example, might be able to limp along for another year. Therefore, it’s good to have a plan. Next year you’re going to have to buy a hot water heater. You’re going to want to figure that into your numbers and what makes sense for you.
Rental properties typically take a while to create any actual income. In Portland and markets on the west coast where you see significant appreciation, you typically don’t see a significant income on the rental side. Most people are holding rentals for appreciation and not for monthly income unless they’ve owned it for a long time. This is something to be aware of because it depends on what you are trying to do for your retirement and how it’s going to work out.
If you have specific questions, please let me know. I am happy to talk more about this or answer any more questions about it. And then, of course, if you can’t get enough of our Dear Claire series, you can visit our Paris Group Realty, LLC YouTube channel. We have all kinds of videos and interesting information about investment properties and much more. Take care.
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