This is an investment as old as the practice of land ownership. A person will buy a property and rent it out to a tenant. The owner, the landlord, is responsible for paying the mortgage, taxes and maintenance of the property.
Ideally, the landlord charges enough rent to cover all of the aforementioned costs. A landlord may also charge more in order to produce a monthly profit, but the most common strategy is to be patient and only charge enough rent to cover expenses until the mortgage has been paid, at which time the majority of the rent becomes profit. Furthermore, the property may also have appreciated in value over the course of the mortgage, leaving the landlord with a more valuable asset. According to the U.S. Census Bureau, real estate in this country has consistently increased in value from 1940 to 2006. While there was a dip during the subprime mortgage meltdown of 2008 to 2010, it has now rebounded and has been increasing overall.
An investor must know the market in which he is searching for property or hire an expert to help. For investors seeking an income stream from rental properties, the most important aspects to consider are property location and market rental rates. As for location, many successful rentals are located in close proximity to major schools. For example, if you buy a property near a state university, students are likely to want to rent it year after year. There are also many other features of a profitable rental property, and some take time to learn. For more, see Top 10 Features of a Profitable Rental Property.
There are, of course, blemishes on the face of what seems like an ideal investment. You can end up with a bad tenant who damages the property or, worse still, end up having no tenant at all. This leaves you with a negative monthly cash flow, meaning that you might have to scramble to cover your mortgage payments. There is also the matter of finding the right property. You will want to pick an area where vacancy rates are low and choose a place that people will want to rent.
Once you’ve found an ideal property in an area where people want to rent, use a mortgage calculator to determine the total cost of the property with interest. It’s also worth researching different mortgage types in order to secure a favorable interest rate for your rental.
Perhaps the biggest difference between a rental property and other investments is the amount of time and work you have to devote to caring for it. If you don’t want to, you can hire a professional property manager. But his or her salary then becomes an expense that impact’s your investment’s profitability.