We all crave financial stability. With greater financial stability, we could stop worrying about bills, have more freedom to enjoy ourselves, and feel more confident about our futures. But how can we achieve this?
One answer is to start investing in rental property. But how, exactly, does rental property work? And does it really have the power to boost your financial stability?
The Value of Rental Property
Acquiring and managing rental property is one of the best ways to make recurring revenue and set yourself up for future financial growth. The process goes something like this: You purchase a property with the intention of turning it into a rental. You fix it up, make any practical changes that are necessary, and then market it to available tenants. When an interested tenant applies, you’ll run a quick background check and, hopefully, allow them to move into your property.
At this point, you’ll begin collecting rent, which should be consistently exceeding your monthly expenses. This results in positive cash flow, allowing you to passively make money every month. You can capitalize on this extra income however you want, and when you’re ready to sell the property, you can.
Of course, we shouldn’t underestimate the challenges associated with being a landlord. It’s incredibly difficult to find a fitting property for your portfolio, especially if you’re first starting out. Finding a reliable tenant can be difficult, and there’s no guarantee they’re going to pay rent on time or take care of your property. And you’ll have a number of legal responsibilities to your tenants and your properties, which may result in some inconveniences and setbacks in the future.
Still, if you hire a property management company, you can usually minimize the time you have to spend on these responsibilities and others. Property managers will handle almost everything on your behalf, from helping you select initial properties to collecting rent and evicting tenants when necessary.
Effects on Financial Stability
How does this strategy affect your financial stability?
- Rental income. The most important factor to note is the consistent stream of rental income you’re going to receive. Assuming you’re able to find a reliable tenant, you can count on them signing a check to you every month for a fixed amount. As long as your expenses also remain relatively consistent, you’ll have independent revenue that you can count on. In combination with other passive income strategies and a steady job, you’ll never have to worry about where your money is going to come from.
- A higher credit score. Having an active property loan and making regular, on-time payments for it will push your credit score higher. Your credit score is highly important for helping you qualify for loans and pass financial background checks. If you already have a high credit score, this may not be of much interest to you, but if you’re still building your credit or if you’re recovering from a sketchy financial history, this could be helpful.
- An emergency fund. Collecting rental income is an excellent opportunity to start your own emergency fund. An emergency fund is a collection of capital designed to be used only in an emergency. This way, if you face an unexpected expense like a hospital bill or a car repair, you won’t have to take on high interest debt to pay it. Rental income is separate from your mainstream of income, so you can keep making ends meet with your typical income and use all your rental profits to build up an emergency fund. Once in place, this emergency fund will make you much more protected against personal finance volatility.
- Semi-liquid assets. Unfortunately, real estate is not considered a liquid asset. That’s because you can’t reliably sell a property quickly, nor can you guarantee what people will pay for it. Still, if you face any financial hardship, you will have the option to sell this house and make at least some of your money back. If you manage to hold onto the property for a long time, and its neighborhood goes through positive changes, you could end up making a lot of money from a sale.
- Growth potential. Financial leverage, with the help of a property loan, allows you to invest with borrowed money. If you make smart investment decisions, you’ll have much higher growth potential than if you only invest the money you set aside personally.
- Snowball potential. On top of that, there’s a lot of room to snowball your rental property earnings. After making a few thousand dollars from your first rental property, you should have enough capital to use as a down payment for your second rental property.
Rental property investing isn’t always the best choice. It’s not always the best fit for an investment portfolio, nor is it guaranteed to pay off. However, for millions of investors, it’s an opportunity to finally get the financial stability they’ve always wanted.