Rental property investment refers to the investment that involves real estate and its purchase, followed by the holding, leasing, and selling of it. Depending on the type of rental property, investors need a certain level of expertise and knowledge to profit from their ventures. Real property can be most properties that are leasable, such as a single unit, a duplex, a single-family home, an entire apartment complex, a commercial retail plaza, or an office space. In some cases, industrial properties can also be used as rental property investments. More commercial rental properties, such as apartment complexes or office buildings, are more complicated and difficult to analyze due to a variety of factors that result from the larger scale. For older properties, it is typical to assume higher maintenance and repair costs.

Rental property investments are generally capital-intensive and cash flow dependent with low levels of liquidity. However, compared with equity markets, rental property investments are normally more stable, have tax benefits, and are more likely to hedge against inflation. Given proper financial analysis, they can turn out to be profitable and worthwhile investments. The Rental Property Calculator can help run the numbers.

Income

There are several ways in which rental property investments earn income. The first is that investors earn regular cash flow, usually on a monthly basis, in the form of rental payments from tenants. In addition, as with the ownership of any equity, rental properties give the investor the possibility of earning profit from the appreciation, or increase in value over time, of the property. Unlike rental income, a sale provides one large, single return.

Responsibilities

Rental property investing is not passive income. It requires time and work. The investor or owner has to take on the role of the landlord and all the job responsibilities associated with it.

General responsibilities of owning a rental property include:

Tenant Management-finding tenants, performing background screenings for potential tenants, creating legal lease contracts, collecting rent, and evicting tenants if necessary. Property Maintenance-repairs, upkeep, renovations, etc. Administrative-filing paperwork, setting rent, handling taxes, paying employees, budgeting, etc.

It is common for rental property owners to hire property management companies at a fixed or percentage fee to handle all the responsibilities. Investors who have limited time, who don't live near their rental property, who aren't interested in hands-on management, or who can afford the cost can benefit from hiring a property management company. This is roughly estimated to cost about 10% of rental property income.

General Guidelines

Real estate investing can be complex, but there are some general principles that are useful as quick starting points when analyzing investments. However, every market is different, and it is very possible that these guidelines will not work for certain situations. It is important that they be treated as such, not as replacements for hard financial analysis nor advice from real estate professionals.

50% Rule-A rental property's sum of operating expenses hovers around 50% of income. Operating expenses do not include mortgage principal or interest. The other 50% can be used to pay the monthly mortgage payment. This can be used to quickly estimate the cash flow and profit of an investment.

1% Rule-The gross monthly rental income should be 1% or more of the property purchase price, after repairs. It is not uncommon to hear of people who use the 2% or even 3% Rule - the higher, the better.

A lesser known rule is the 70% Rule. This is a rule for purchasing and flipping distressed real estate for a profit, which states that the purchase price should be less than 70% of after-repair value (ARV) minus repair costs (rehab).

Internal rate of return (IRR) or annualized total return is an annual rate earned on each dollar invested for the period it is invested. It is generally used by most, if not all, investors as a way to compare different investments. The higher the IRR, the more desirable the investment.

IRR is one of, if not the most important measure of the profitability of a rental property