You’re thinking of investing in another home. You can rent it out to tenants and make some extra money, hardly without any work or effort on your part! Seems like a dream come true. But is it really? What can you expect out of an investment home? What are the benefits, and what do you need to be careful of? In short, when are investment homes worth the investment?
A Long Term Investment
The first thing to be aware of is that investment homes aren’t a get rich quick scheme. The process can take decades. It needs to be well-researched and planned out in advance, so that you know exactly what you’re getting into. What kind of home are you buying, and what’s the neighborhood like? How much can you reasonably charge in rent? How long will it take to make back your investment and yield a profit?
Make sure you also know exactly how much of an investment you’re making. It’s more than just buying the home and paying the mortgage. You may need to spend money fixing it up before it’s ready to rent out. Then, once the tenants have moved in, maintenance and repairs are your responsibility. There may also be legal and accounting fees involved, as well as vacancy periods, wherein rent isn’t covering mortgage, utilities, and other expenses.
A good rule to keep in mind for investment homes is the 50% rule. It states that, on average, the expenses on your property will total about 50% of your income on the property—not including the mortgage payment. This ratio may go up and down over time, long term, it will total about 50%.
Benefits of Investment Properties
If you can do it right, though, and go in knowing what you’re doing, and with a clear plan for how to do it, investment properties can yield a number of great benefits, such as…
- Extra Income. No, an investment home isn’t a get rich quick scheme. But still, the rent you collect can yield a nice, regular supplement to your regular income. After the mortgage and other expenses, it may be only a couple of hundred dollars per month, but that’s still a couple of hundred dollars you didn’t have before.
- An Appreciating Asset. Even if you’re not making huge amounts of money in rent, your home will go up in value over time, so that, if you sell the property, say, a decade or so later, you can make a significant profit from your initial investment.
- A Tax Write-Off. The expenses on your investment property may seem daunting while you’re making them, but come tax season they’ll be a great boon. Everything from mortgage payments to insurance payments to maintenance and repairs to travel expenses (getting to and from your property) and more are tax deductible. Talk to an accountant to see just how much you can deduct come tax time.
Investment homes shouldn’t be purchased on a whim. If you’re just looking to make some quick cash, and don’t really know what you’re getting into, then think again before investing. But if you’re willing to put the effort, the money, and most importantly, the time into an investment property, then it can be a profitable and rewarding experience for years to come.