Many people have been forced to look for alternative income streams as a way to maintain financial stability in an increasingly turbulent time. Due to each day having just so many hours, however, it is not feasible to maintain more than one or two active income sources as they require direct and continuous effort, such as building your career and professional expertise. That is why most people turn towards opportunities for earning passive income, with one common recommendation being becoming a rental property investor.
Indeed, people often hear about this type of investment bringing in a significant amount of extra money every month without taking up a sizeable chunk of their time. While this could eventually be true, the reality for most is that rental properties offer a long-term approach to building wealth. After all, they do not provide an instant infusion of money like a wholesale deal or a fix-and-flip operation. Instead, the owners of the rental property earn a small amount with each monthly payment from their tenants. However, how successful the rental property will be is influenced by numerous factors, many of which, such as identifying the right time to purchase such a property, must be accounted for before any money has actually changed hands.
Indeed, a significant percentage of first-time entrepreneurs and SME (small and medium enterprises) owners soon find themselves in financial trouble facing insolvency, liquidation, or bankruptcy. With the help of professional insolvency practitioners, businesses can not only avoid being shut down but manage to achieve a more stable financial state. The in-depth knowledge of the experts allows them to identify efficient and appropriate solutions for the particular business and its unique circumstances.
When to Buy Rental Properties?
The housing market has been beyond hot. Home and property prices have been soaring to unprecedented highs in multiple countries across the world. For example, the US reached a record median sales price of an existing home of $416,000 in June 2022. Overseas the situation is practically identical, with the UK posting a record average house price of £294,845. Amidst increased buyer competition and sky-high prices, identifying good rental investments in these conditions is extremely difficult.
Things may be about to change, though. No market can go up constantly, and after hitting its ceiling, the housing space is bound for a correction. The slowdown is also accompanied by a slight fall in mortgage rates, opening up an easier route to additional funds.
The Impact of Inflation
Investing in rental properties becomes an even better choice amidst high inflation as real estate is viewed as an inflation-protected asset investment. With access to relatively low-interest loan options, investors in this sector are buying assets with value that appreciates with time while any debt taken on as part of the deal is depreciating in value.
In essence, buying a rental property with fixed-rate mortgage financing can be regarded as a leveraged bet on inflation, a decision that seems reasonable considering the state of the world economy. In fact, according to some experts, a rental property may be on par or even better than gold when it comes to inflation hedging. Before you start enthusiastically looking for properties to invest in, it is paramount to consider some of the inherent characteristics of this specific market.
The Seasonality of the Housing Market
Apart from the general state of the market, investors must also acknowledge the peak and off-peak seasons that naturally influence the sector. As a general rule, the real estate market is slower during the winter months and starts to heat up with the approach of spring. There are several causes for this seasonal behavior. For example, parents are far less likely to initiate a move to a different place in the middle of their children’s school year. The moving process itself is far more challenging during the cold weather, as it may take much longer to transport any furniture and people risk having to spend several days in unfavorable conditions.
Thanks to this seasonality, the rent also fluctuates. Due to the increased number of people who prefer to move during the summertime, rent is typically higher during these months. Inversely, the rent is usually at its lowest during the period between October to February. In short, you may wish to buy a rental property during the winter when there is high inventory and less competition, but do not limit yourself as motivated sellers could offer great deals at any time.
The Importance of High Inventory and Type of Market
Potential rental property investors who are still figuring out the basics of the sector may wish to be careful when operating in markets with low inventory and high costs. The increased competition during the summer period often results in a limited number of available properties while also pushing prices up.
Fall and winter are viewed as more favorable periods to look for good rental property deals. The decreased instances of people changing homes create low demand for housing, leaving an increased inventory of rental properties spread around a lower number of potential buyers. In these conditions, sellers – especially motivated ones, may be willing to lower their asking price and be more flexible during negotiations in order to attract offers.
Recognizing whether you are dealing with a buyer’s or a seller’s market is equally as crucial. Operating in a seller’s market means that the demand for housing exceeds the available housing supply in the specific area. With an abundance of buyers, the for-sale properties do not stay listed on the market for long and can typically go for higher-than-average prices. In these conditions, investors have to move fast and decisively or risk having a competitor acquire the property they are aiming for. In a buyer’s market, the roles are reversed – there is far more available housing inventory than the current demand for it. In this market, sellers are incentivized to either wait for better market conditions or lower their asking price.
Consider Your Personal Conditions
Even if the market is ripe with exciting options for investment in rental properties, you should not force the issue if your personal circumstances are strenuous. For example, the outcome of the deal could be heavily influenced by your financial situation. The best approach, hands down, is to buy the chosen property in cash, as doing so will free up profits that would otherwise be eaten by monthly mortgage or loan payments. Not many have the luxury of such cash reserves just lying around, so taking unnecessary risks to complete an all-cash transaction may not be worth it.
It is also crucial to have a clear purpose when buying a property. While the essence of the deal may be as simple as generating a good amount of profit, the route you take to achieving it could vary. Rental properties offer two main ways to earn revenue for their owners. First, there is the monthly rent paid by the tenants. The received payments could be enough to cover the monthly property ownership costs while also providing good profits on a regular basis. Then, you can factor in the home price appreciation. All the while you are receiving rent payments, the real estate property is likely to only go up in price. If you keep it for enough years, it is quite feasible that you will be able to sell it for a hefty profit.
Why a Rental Property Investment May Not Be for You?
Apart from requiring a significant amount of initial capital, entering the rental property business has other characteristics that could make it a less enticing option. Let’s start with its limited liquidy. Unlike other available investments – stocks, bonds, etc., selling a rental property could take months, if not longer. If you need to free up funds in a short amount of time, it could mean listing the property at sub-optimal prices and conditions and having a limited time window to field offers. Investors shouldn’t dismiss the possibility of higher property or income taxes taking away some of their projected revenue, either.
Then, there is the whole business of having to deal with tenants. Even with a professional local manager, you may still need to handle a lot of unplanned issues. Neighbors may be complaining about the noise, things brake and even catching on fire leading to significant damage, and even the best screening process could still approve tenants who cannot cover their monthly rent. Depending on the area where the property is located and its specific laws, evicting a bad tenant could be a lengthy, complex, and expensive process.
Entering the real estate and rental properties business can be an extremely lucrative decision. However, do not underestimate the risks surrounding it, and never rush into a deal based on the fear that you are going to miss some arbitrary timing. Although certain macro market conditions and seasonal behavior could make the sector more favorable for such investments, ultimately, it will all depend on whether your financial situation is healthy enough to absorb the initial capital investment. After all, rental properties may require a long time before they begin generating pure profits for their owners.