For people in a position to invest in rental properties, now could be the ideal time. Despite higher-than-average mortgage interest rates, the equity gains and potential for rental income may be able to offset those concerns.
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Additionally, given that more Gen Zers are opting to rent over buying, despite making comparatively more money in their 20s than millennials did, according to a RentCafe study, investors may want to leap before the market cools enough to glut it with buyers.
Real estate experts explain why you should not wait to invest in rental properties and the strategies for making it as affordable as possible.
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Rental Demand Is High
Perhaps the best reason to invest in rental properties is that rental demand is high, according to Kris Mullins, the chief marketing officer of Capital Max.
“We are witnessing a massive surge in renters, driven by factors like rising student loan debt delaying homeownership for millennials and a preference for flexibility among Gen Z.”
Mullins insisted that this isn’t a temporary trend but rather a fundamental shift.
“With a growing renter pool chasing a potentially limited supply of rental units, vacancy rates are likely to stay low, which translates to consistent rental income for property investors.”
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Rental Income Builds Generational Wealth
The benefits of purchasing rental properties can be substantial, according to Ryan Barone, CEO of RentRedi.
“Our internal data shows that the average monthly rent collected by independent landlords for single-family rentals nationally is $1,361.”
Not only does rental income help to pay down your mortgage faster, equity builds as the property appreciates, he said. You can then reinvest that equity in additional rental properties.
That gives you a boost in income now, and, he said, “[b]uilding a rental property portfolio can increase generational wealth substantially over time.”
You Can Make Others’ Money Work For You
Perhaps one of the best reasons to invest in rental properties, according to Suzanne Moore, founder and investment-focused realtor at Central Oregon Investor Network, is “real estate is the only asset you can buy with someone else’s money — a loan — and then have someone else pay it off for you — the rent you collect.”
She said that the best part is you don’t need to have a lot of money to start out.
“Real estate investing is accessible to anyone, even Gen Z.”
You Can House Hack
First-time investors who don’t have a lot of cash for a down payment or who aren’t sure about becoming a landlord can start off small, Barone said. Then, they can build upon their initial investment if and when they become more comfortable with the process of renting property and have more capital to invest in it.
“One way to do this is through house hacking. This method requires little to no upfront investment because you can rent rooms or spaces in your home while you still live there,” Barone said.
Moore heartily cosigned this and has years of experience doing just that. In her case, she bought a house that was too big for her family and rented out the upstairs to a family of six, while living in the basement apartment, around 900 square feet.
While she said it might not be everyone’s ideal living situation, it allowed them to save for a vacation rental.
“And it was pretty nice to have an apartment that we could lock the door and leave, knowing that our property was being well cared for by a family who loves living there.”
Look For First-Time Buyer Programs
If you don’t already own property but want to get in on rentals, look for first-time homebuyer programs that allow for zero down payments or 3% down payments on primary residences, Barone said. Then, you can rent out extra rooms for living spaces or even storage, parking. and workspaces, he added.
For people with existing properties, he recommended investing money into converting rooms, basements, garages or yards into spaces you can rent out.
“The extra income generated from house hacking can be used to pay down mortgages and build equity faster, as well as reinvest in additional rental properties,” he said.
One of Barone’s customers used house hacking to enter the real estate investing market right after graduating from college to buy a small home that she renovated and sold, earning equity she reinvested in more properties. Now she earns passive income.
Calculate Your ROI
Purchasing rental properties can be a good investment in any market, as long as it’s done smartly, Barone said. This means putting in enough research and planning to set yourself up for success.
He said it’s important to predict the potential return on investment.
“There are many factors that can contribute to a higher ROI [return on investment], such as the condition of the property and rental trends and vacancy rates in the area,” he said.
One of the most important considerations is location, of course. You want to seek properties within close proximity to desirable amenities such as good schools, shopping and entertainment centers, parks and recreational facilities, and transportation hubs. These not only tend to attract higher quality tenants but fetch higher rents.
Learn Market Trends
Getting up to speed on market trends is a great way to help you predict whether your property value will appreciate or not, Barone said.
“Look for properties located in high-demand areas with strong economic indicators such as population growth, job opportunities, the presence of universities or business districts, and cities that are investing in new developments, revitalization projects, or infrastructure improvements.”
Additionally, purchasing properties in different locations will help to diversify your portfolio, insulating your business from fluctuating markets, he explained.
However, Sacrifices Are Required
Like anything in life, you’ll have to sacrifice something to get started, Moore said, and it’s typically one of these three:
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Time
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Money
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Comfort
So, if you are short on time, but you’ve got some money in the bank, you can add a vacation rental or long-term rental to your portfolio to begin diversifying and creating a passive income stream and start amassing equity, Moore suggested.
“Buy and hold is a great entry point for people with money but little time,” she said.
If you’ve got a lot of time, maybe you just graduated from school, but are short on funds, you can use your time as a way to hustle and find deals, she said.
“Wholesaling is a great entry point for folks with time but not a lot of money.”
If you fall somewhere in the middle, you might be willing to sacrifice comfort and do a live-in flip.
“This is when you buy a run-down home, live in it and fix it up for two years, and then sell and keep the profits 100% tax-free, legally.”
Accept Temporary Discomfort for a Payout
Getting uncomfortable and going the road less traveled on the journey to rental property investment is absolutely 100% worth it, Moore insisted.
The renovations they did on their first property took three months and cost $50,000 but they recouped that money in the first year renting it out.
“It’s an asset that has appreciated and generated cash flow. That means that someone else has been paying the mortgage on the vacation rental since three months after we bought it.”
This enabled her to leave a corporate job and start her own real estate investing company.
If you’ve been on the fence about rental properties, talk to a real estate agent, do your research and be clear about your finances. This might be your first step to financial security.
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This article originally appeared on GOBankingRates.com: Real Estate Experts: Why You Don’t Want To Wait To Invest In Rental Properties
