Whether you’re new to investment properties or just looking to expand your already credible portfolio, a long-term rental property is one of the most popular ways to create monthly passive income in real estate. Here’s your guide to investing in long-term rental properties.
Benefits of Long-Term Rentals
Real Estate Appreciation
A benefit of investing in long-term rentals is the nearly guaranteed return of real estate appreciation. Although the price of your investment property may fluctuate, it’s safe to say that an up-to-date rental property in a good location will always go up in value over time. In real estate investing, this is known as appreciation. Investors enjoy the benefit of having their long-term property increase in value, that way they can sell it for a profit later on.
When investing into rental properties, it’s common for investors to take advantage of tax deductions. For various loans, the interest you pay on an investment property may be tax-deductible. You can also benefit from depreciation by writing a portion of your property off every year. In some states, your rental income is not subject to social security tax. For an investor that is planning to buy and hold, these tax benefits help reduce risk and increase returns.
Monthly Rental Income
One of the main benefits of a long-term rental property is that it can produce monthly passive income. When setting your rent price, be sure to keep your profit margin comfortable and while also staying competitive with local properties.
How to Find a Long-Term Rental
Want to find the perfect long-term rental property for your portfolio? Here’s some tips to help you look in the right places.
Choose the Right Location
When searching for the perfect location for a long-term rental property, it’s common to look in a city or locale where the population is growing or a revitalization plan is underway. Often, this represents a potential investment opportunity with a generous return on investment. When looking for the right property for your portfolio, don’t be tempted to buy cheap properties in bad neighborhoods. Even though the price may be right, the location of the property will make or break a lease.
Locate Profitable Investment Properties
Let’s face it, not every property will fit your investment strategy. To find a profitable property, it’s best to look at the possible expenses such as interest, taxes, insurance, and maintenance and repair fees. Real estate investors should look at expenses on a monthly basis to determine if the property’s cash flow is positive or negative. When determining the profitability of your long-term rental, be sure to think about local vacancy rates and how different times of the year can affect your cash flow.
Financing Your First Long-Term Rental Property
Found your ideal long-term rental property? Now it’s time to figure out how to finance it. Here are the top ways to finance your new investment.
You don’t need to have cash to get your feet wet in real estate, but if you have the cash reserves available it might be better to go in with an all cash deal as this would save you the overhead of interest rates. For many investors, cash is not available and funding needs to be sought out in the form of traditional financing or hard money loans.
Traditional financing is just another term for a bank loan, such as one that follows the federal regulations of Freddie Mac and Fannie Mae and includes a long term 30-year mortgage. Although these loans have lower interest rates, you are paying the interest for a longer period of time. Many applicants enjoy the smaller payments, but a savvy real estate investor might prefer a more versatile loan that offers shorter terms.
Hard Money Loans
A hard money loan is a type of financing that is offered by a private financial institution. These loans do not adhere to the same federal regulations of traditional financing and get cash in your hand fast, making them the more flexible and the preferred option for an aggressive real estate investor. Although these loans tend to have higher interest rates, the shorter term equivocates to about the same amount in fees when compared to traditional financing methods.
RCN Capital offers short-term and long-term financing options for real estate investors. Whether you are looking to fix & flip properties or hold properties for rental income, RCN has flexible options that are suited to your needs. Connect with us today to discuss your next real estate investment.