Diversifying Your Portfolio With Rental Property
The stock market is one of the only openly discussed methods to invest, which makes it important to inform investors that SFR investment real estate can be a creative and consistent way to diversify one's investment portfolio. In The College Investor, an article titled, "Why Rental Properties are a Great Way to Diversify Your Investments," goes into great detail about why rental properties are one of the best ways to diversify. The author begins with one of the most important subjects, cash flow.
When investing in rental properties one has to invest for cash flow and not put too much reliance on appreciation. The suggestion is to buy a house for the cash it will give the investor presently, and not to bank solely on the asset's appreciation potential. Investors should buy rental property for what it can give them at the moment, not for what it can give them far in the future. To build upon that subject, how does someone figure cash flow on rental properties? There are a lot of factors to consider, more than just mortgage payments. Such as vacancy, maintenance, taxes, insurance, and much more. Figuring in all of these costs, and what the price of rent will be, is what determines the cash flow, and it is important for investors to practice their due diligence when calculating their assumptions.
Like many investments, rental properties do require money up front. Deciding to invest in rental property means deciding to buy a house and houses require down payments. Most banks require a 20-25% down payment at least (especially for investment property), so the cost of the investment depends on how much money the investor has available initially. There is a way to pay less up front and that is to buy as an owner occupant. This requires the buyer to live in the home for one year before being eligible to rent the property. There is also the possibility of buying below market value. Short sales and foreclosures are a great way to acquire property at lower cost, but it may require some substantial updating. Auctions are also a good way to get properties below market value. When looking for rental property, it is best to be aware of where to buy to get a solid rental property. The best ways to do this would be for buyers to buy where they live or invest with a turnkey company if they want to go out of state to take advantage of superior rental markets.
To conclude, the author discusses investing as a college student and addressing the risk involved in buying rental properties. Since college students are often low on cash and income it may sound difficult for them to invest in real estate. This is where something called a kiddie condo loan comes into play. It allows a college student or young adult to buy a home with a down payment as low as 3.5% with a blood relative co-signer. It allows them to live in the house, rent out rooms if they want, and when they are ready, rent out the house. While investing in rental property, as a young adult or older, sounds attractive, there are risks involved with every investment.
There is always the possibility of the housing market crashing again. Even though this is a possibility, and can affect many people, it is often not as severe for those already owning an investment. A longer holding period allows the investment to absorb market volatility. Rent prices may drop some but rent is not tied to home values. Investing in rental property can be as risky as any investment, but it can have a great payout and is the perfect way to add diversification to any investment portfolio. it just important to practice due diligence or rely on professionals for advice before jumping in.
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