Are rental properties REALLY a smart investment?

Rental Investment Property

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Investment in rental properties, especially residential properties, is increasingly being seen as a hot new earnings opportunity.  In the wake of the economic down turn, as the rate of home ownership in the U.S. has fallen, the rental market has grown steadily.  With mortgage lending standards tighter and cash for potential home buyers more scarce, the number of renters has climbed, pushing rents ever higher in most American markets.  At the same time interest rates on mortgages, for those that can afford them, are still near historic lows, creating the potential for more income and less outflow for rental property owners.  To many people, real estate also seems pleasantly tangible and more knowable than stocks or securities.  They like the idea of being able to drive by and actually see their investment.  And as we all know, real estate is simple, right?

The answer, in short, is not necessarily.  Owning rental real estate is not ideal for everyone, and that especially applies to anyone who thinks it is simple.  As the aforementioned downturn amply demonstrates, real estate is not always a surefire investment.  Even people with lots of experience and a good grasp on the vagaries of the market can and do get burned.  This is one of the reasons that lenders require much more from borrowers seeking loans on investment rental properties, known in the parlance of the industry as Non-Owner Occupied, or NNO, real estate.  If you are an inexperienced investment property owner, the hurdles may be higher still.

Since your ability to pay back a loan on an income property is not always completely in your hands the way it would be with a home mortgage based on your known income, the interest and down payments on these properties will necessarily be higher.  And since the other unknowns on investment properties, such as the ability and inclination of your tenants to pay their rent regularly and the impermanent nature of their relationship to you as landlord, are also far greater, the screening and verification process is more thorough, adding to upfront costs in fees.  Typically the down payment on an investment property is much higher than that for an owner occupied home.  Many lenders, including Litchfield Bancorp, ask prospective first-time investment buyers to make a 30% down payment.  Universally, investment property financing also requires a better credit history and stronger financials than would be asked of a standard home buyer.

However, if you do your homework, practice due diligence and do not plunge headlong into a real estate investment opportunity with little or no research, chances are good you will emerge with a positive cash flow, eventually at least.  A few of the financial factors you need to objectively evaluate are the net income you can anticipate, i.e. gross income minus expenses; cash flow versus debt payments; long-term maintenance costs; potential for appreciation and/or depreciation; and comparable neighboring properties.  Take a long hard look at all of these and then add in the costs of hiring a management company if you are not up to performing the day-to-day tasks that owning a rental property require.  Consider all of the things that can go wrong with any residential structure.  Then discuss your plans with an unbiased financial expert.  If all of these factors add up for you, then yes a rental property investment may be right for you.

Jennifer Ives-Groebl
Vice President, Senior Mortgage Lender
NMLS MLO ID: 532621

Author: Jennifer Ives-Groebl

Jennifer has been with Litchfield Bancorp since 1994 and was promoted to Assistant Vice President and Senior Mortgage Originator shortly after graduating the Connecticut School of Finance & Management in 1998. Stationed in both our Torrington and Litchfield locations, Jennifer is well known and respected in the local residential real estate community and recognized as a resource for some of the more difficult transactions. Jennifer resides in Torrington and is actively involved in the local community. She is a long time member of the Torrington/Winsted Rotary club and is currently serving as its Assistant Treasurer. Jennifer is involved with Litchfield County Board of Realtors and serves as chair of the Audit Committee and a member of the Public Relations Committee. She is also a member of the Fuessenich Park Partnership; and through Education Connection, has participated in the Mentoring Program.