It’s a fact: Florida has a very attractive rental market. The number of people who choose to rent their homes is increasing across the state, and their rents are rising along with this number. The prospect of becoming a landlord can be enticing in this climate. But are rental properties a good investment? The answer to this question might not come so easily.
Are rental properties a good investment? Owning rental homes can create an additional passive income stream and generate wealth quickly, especially if you play the game correctly. Rental properties can also create a hedge against inflation, which feels especially relevant as it rises at record rates. You need to consider your objectives and financial goals when considering purchasing rental properties.
Let’s explore some of the details about today’s rental market and additional information you’ll need to determine if rental properties are a good investment for you.
Are Owning Rental Properties Worth It?
Real estate is big business. The prospect of purchasing investment properties can certainly be enticing, especially in Florida where 34% of the state’s housing units are renter-occupied. And 61% of rental properties on the market in Florida are single-family homes.
Renters pay a pretty penny in Florida, too. A recent study about rent prices from Florida Gulf Coast University found that renters in Florida pay up to a 21% premium for rental properties. As of May 2022, the average renter in Fort Myers paid $2,162 for their apartment or rental home.
This means there definitely money to be made in rental properties in today’s real estate market, especially in Southwest Florida. But is it worth it? Let’s look at some of the pros and cons of owning rental properties.
Pros of Owning Rental Properties
For many people, owning rental properties is definitely worth it and can be a good idea. Some of the benefits of owning rental properties and investing in real estate include the following:
- Rental properties created an additional stream of income that can be quite lucrative, especially when renters pay a premium as they do in today’s market.
- Long-term appreciation of homes is moving at record rates, meaning you’ll likely make money on the home itself.
- You might find some tax benefits associated with owning multiple properties, including 1031 exchanges.
- Rental properties can act as a hedge against inflation, as home values often increase faster than inflation.
- Owning rental properties can diversify a portfolio, so you aren’t keeping all your eggs in one basket.
Cons of Owning Rental Properties
Some people find that owning rental properties can come with a few caveats. Let’s look at some things that might make owning rental properties less appealing to some investors.
- When it comes to rental properties, you have to spend money to make money. This can involve a significant investment upfront.
- Unlike stocks and other investments, rental properties aren’t as liquid. Your money might be tied up for several years, unlike the stock market where you can sell easily.
- You have to deal with tenants or pay a management company, which can be a hassle.
You might find there more benefits to owning a rental property than against it. However, knowing if owning rental properties are worth it truly depends on your unique financial situation and your individual goals.
Is a Rental Property a Good Investment Long-Term?
In most cases, tenants pay more in rent than it costs to pay the mortgage, property taxes, and maintenance on a rental property. When this is coupled with continually increasing home prices, you might find that rental property is a good long-term investment due to cash flow and growth equity.
Another reason why owning a rental property can be a good investment is because it puts you in charge of your wealth. You can look at market trends and determine how much rent to charge and what kinds of properties are most lucrative. You can choose what kind of people you want to rent your home to and how you screen them. Putting yourself in charge of your money can also be good long-term, especially if you know what you’re doing.
Ready to buy a rental property and reap returns on investment like savvy real estate investors? Let’s look at a few things to look for in a rental property.
What Should I Look For in a Rental Property?
Buying a rental property is a little different than shopping for a primary residence. Here are four things you should know and look for before making an investment.
Location, Location, Location
Real estate almost always boils down to location, even when it comes to investment properties. When looking for a rental home, you might consider the most up-and-coming areas. Not only are these areas growing in population and attracting new residents, but property values are rapidly increasing.
Five of the up-and-coming areas in Southwest Florida right now include:
- Bonita Springs
- Cape Coral
- Estero
- Sarasota
- Naples
You’ll want to look for areas within an easy commute to major employers, consider school ratings, look for low crime rates, and get details on property taxes.
Avoid Fixer-Uppers
Fixer-upper homes can be easier on the wallet when it comes to purchasing price, but pitfalls when it comes to repairs and renovations. You’ll likely have to invest even more money to make it market-ready, which can eat into your rental income.
First-time property investors especially might want to shy away from the extra work and expense of purchasing a fixer-upper.
If this isn’t your first rodeo and you’re an experienced real estate investor, you might have better luck with these kinds of properties. If you’re an expert on the needed repairs and don’t mind spending the required money and time investment, you might have better luck.
Get the Financing Right
You have to spend money to make money. The best option for many people when it comes to investing in rental property is to pay in cash. This means you can start making your money back right away.
However, paying for a rental property in cash isn’t always possible and might not be the best choice for you given your financial situation. You’ll want to look for the best interest rates possible, which often require an excellent credit score. You’ll also need to come up with at least a 20% down payment, as private mortgage insurance isn’t usually an option for investment properties.
Can You Manage?
Managing a property is a lot of work. If you have time, know-how, and don’t mind the potential for phone calls at any time of day, you might consider managing your property yourself. If not, you might be best off working with a property management company.
Most property management companies charge 10%-25% of the monthly rent to manage the property. That means if your tenant pays $2,300 each month, you might pay $230 to $575 for property management services. It could be worth it. Property managers can help lease the home, screen tenants, organize maintenance and repair, deal with collections and evictions, and more.
You might even want to get a lawyer involved. Landlord-tenant laws in Florida can get tricky.
Making sure you buy the right rental property and get the right help can make your experience as a real estate investor as painless as possible.
How Much Profit Should You Make on a Rental Property?
Some financial pundits preach that if you make as little as $100 a month on your rental, it's worth the investment. To make a profit, you need to charge your tenants more than you spend.
There are a few rules of thumb to follow when determining how much profit you might make on a rental property.
What Is the 2% Rule?
One rule of thumb real estate investors often follow is called the 2% rule. This rule dictates that the monthly rent charged to tenants needs to be at least 2% of the home’s value for the landlord to make money.
This means that if your investment property is valued at $350,000, you need to charge at least $7,000 a month in rent to turn a profit. If your investment property is valued at $150,000, you need to charge at least $3,000 to make it worth your while.
Other Considerations
Another important thing to keep in mind is that you should set aside 40% of your monthly rental income for repairs.
This means that if you charge $2,300 a month in rent, $920 should go into an account dedicated to maintenance and repairs. If you purchased the home in cash, that means the other 60%, $1380, is profit. If you financed the home, what’s left over after your mortgage payment is profit.
You’ll also have to factor in property taxes and taxes on your income earned, as these can eat into profit, too.
Purchase Investment Property with Royal Shell on Your Side
Are rental properties a good investment? They can be when you have the right partner on your side. Royal Shell Real Estate is ready to go to work for your when you’re ready to invest.
With offices in some of Florida’s fastest-growing areas like Ocala, Cape Coral, Fort Myers, and beyond, you’ll find that Royal Shell is always where you need us. Let us help you come up with a strategic plan for your next real estate investment.
Reach out to Royal Shell Real Estate online or call (855) 242-9926 for additional information.