Is 2017 the Year to Invest in a Rental Property?
Real estate is one of the asset classes rarely mentioned during a planning session with your stock broker or financial planner. Usually during these reviews it’s based upon an allocation of funds, your age and when you expect to retire. If you’re in your 30’s you’ll probably be pointed more toward stocks and less toward bonds. Stocks are more volatile but provide greater returns over time compared to bonds. Bonds are not volatile, the return is guaranteed but the yields are paltry compared to a stock or mutual fund. As you head closer to retirement age your financial planner will suggest moving more funds out of stocks and into more conservative investments such as bonds. But what you won’t hear is real estate. Typically, anyway. But you should consider rental property.
Rental property is a real asset that is secured. The asset will grow in value over time while each month providing a positive monthly cash flow. When considering a rental property in 2017 a little math is needed. First you’ll need to look at rental properties in the area you’re considering and compare that monthly rent with your financing and maintenance costs. Real estate investors want to see the rent be more than enough to cover the mortgage payment plus a monthly amount of property taxes, insurance and maintenance costs. If the rent isn’t enough to cover those expenses, the real estate investor discards that potential purchase and looks for another. When you hear the term, “Don’t be paying someone else’s mortgage” it refers to renters who do pay a landlord more than enough to cover all the expenses owning and financing a rental property.
There really is no other asset class that provides the owner a positive monthly cash flow while increasing in value over time. Stocks might but stocks will also fall in value. Companies that issue public stock can have an outstanding quarter and the value of the stock will rise. For companies that pay dividends, stock holders can receive income from the stock but fewer and fewer stocks do pay dividends. On the other hand, should the company have a poor quarter the value of the asset will fall. If the company does poorly continuously over time it’s possible the company will file for bankruptcy leaving the stock worthless. Real estate however will never fall to zero.
2017 might very well be the best time in years to buy a rental property. Why? Because interest rates are still at relative lows and while there can be rate increases over the longer term they’re low now. And, real estate values have bottomed out and are helping to secure the financial futures of rental property owners. In 2018 rates will be higher and houses will cost more. That’s why many are buying rental property now instead of later to take advantage of low rates and rising values. If you’ve been thinking of your portfolio allocation and real estate is currently not part of it, it’s time to take a closer look.
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