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Not every renter looking to buy a home dreams of giving up their lease. Some people want to remain tenants even if they become landlords.
The idea behindrental investment“Individuals rent a primary residence in one city, then purchase an investment property elsewhere and rent it out as a short-term or long-term rental,” said Danielle Hale, chief economist at Realtor.com.
“This can be a good way to get into the real estate market,” she said, especially if you live in a Home The price is beyond your budget.
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That said, becoming a landlord from afar can be tricky, and for first-time buyers, investing in rentals can be trickier than buying the property they plan to live in.
“There are some costs involved that you need to make sure you research and consider before you go in,” Hale said.
When “rental investing” makes sense
Hale said rental investing could be an option for people with relatively high incomes working in big cities where rents and housing prices are high. These are people who may have room for savings in their budgets but find it too expensive to buy a home in their metro area, she said.
“So they’re going to look for a cheaper market where their savings might be able to translate into a sizable down payment,” Hale said.
Small investors, or those who own up to 10 investment properties, accounted for 62.6% of investor purchases in the first quarter of 2024, according to A recent report from Realtor.com. This number represents the highest proportion of small investor activity in the history of this data, which goes back to 2001.
Hale said the data doesn’t necessarily differentiate between small investors and those who are rental investors. It also does not specify whether they own their primary residence or a second rental home.
“People have a lot of worries about big events investor Get into the single-family segment and compete with owner-occupiers,” she said. “While large investors have been making headway and expanding their share, they still make up a relatively small share of the overall U.S. landlord population.
Some changes in the market that benefit buyers may also benefit renters.
The 30-year fixed-rate mortgage rate has dropped to 6.85%, the lowest level since March. according to A new analysis from real estate brokerage site Redfin.
“Someone with a monthly budget of $3,000 can now spend $20,000 more on a home on the same budget,” said Daryl Fairweather, chief economist at Redfin.
He said lower interest rates would be “good news” for renters seeking mortgages. But it’s important to remember that rental prices come down As the supply on the market increases.
“If there are other properties on the street with lower rents, they may have a hard time getting tenants,” Fairweather said.
“Rents are rising a bit, but not that fast, and in parts of the country where a lot of new supply is coming online, rents are actually falling,” she said.
5 questions to ask yourself before investing in rentals
While rental investing may be an opportunity to become a homeowner, those who want to try this path must consider all the pros and cons. Here are five questions to ask:
1. Will this strategy work for the property I want to buy?
Take inventory of the short-term rental regulations in the towns, cities, and states you are considering, as some areas may have rules that limit or even prohibit rental activity. As you narrow your search to specific properties, keep an eye out for certain properties homeowners association A condominium or cooperative board may have regulations Rentals are also restricted.
2. Do I need to hire a property manager?
If you want to be a landlord, you can either manage the house or apartment yourself or hire a property manager to act as an intermediary between you and your tenants.
Approximately 55% of small portfolio rental owners hire property managers because they do not live near their rental property, according to A report on the state of the property management industry from property management software company Buildium. The website surveyed 1,885 property management professionals in May and June 2023.
However, hiring a property manager comes with a cost, which depends on factors such as the location of the property and the services provided. Property manager fees can be up to 25% of monthly rent, depending on specification, according to to apartment listings.
3. Can I afford all the costs associated with buying a home?
Buying a property is more than just that supply this down payment, closing costs and monthly mortgage payments. You must also consider property tax, Insurance and maintainamong other fees.
Having a clear understanding of what those dollar numbers might look like now and how they might change over time is key, especially in an area you’re less familiar with.
After you evaluate all the factors involved, you can determine whether your rental will be enough to cover your expenses.
4. How much competition will you have?
Fairweather said if you enter the rental market now, you’re likely to face more competition from other landlords or leasing companies, especially in places like the South where more new construction is available.
“Watch rental trends,” Fairweather said.
Rental prices are rising along the coast. But in areas like the South, the numbers are falling. That’s good news for renters, Fairweather said, “but if you’re a homeowner, it’s not good news.”
5. Can you afford the vacancy?
Short-term rentals include benefits such as the ability to use the property yourself and more flexible pricing based on seasonal demand. But Hale said high year-round vacancies could be a drawback.
During slower times, you might end up with two months’ worth of home payments: rent on your primary residence and a mortgage on an investment property.
At the current mortgage rate of 6.85%, the monthly mortgage payment for a typical $400,000 U.S. home is approximately $2,647, according to to Redfern. Check to make sure you can afford the cost on top of your own monthly rent.
