Investment: Rental Property
A rental or lease agreement is an understanding between two individuals concerning the use of a particular property. A person can lease real estate (such as an apartment or business property) or personal property (such as a car or a boat). A lease should cover basic issues such as the term of the lease, the rent or other costs, how payments should be made, and any restrictions on the use of the property. The property owner is often called the “lessor”, and the person using the property is called the “lessee.”
When purchasing property to lease or rent, there are a few important issues to carefully consider.
- Location — If you plan to refurbish the property, then a place nearby is ideal. You may want to have a property management company collect rent and find renters. They usually charge a small percentage of the rental fee, but it is well worth the piece of mind, especially for distant locations.
- Neighborhood — Typically, investors do not buy rentals because they want to reside there in the future (if you do, then see Vacation Properties) so don’t worry about the neighborhood. Look for a decent priced property in a high demand rental district. Although if you plan on refurbishing the property and being present after dark, then look for a safe location.
- Time — Most rental properties are owned for three to four years and then sold for a nice profit that is generally rolled into another property. Other investors use the equity from one rental to purchase additional rentals to build wealth quicker. In this case, investors aren’t taxed on the gain because money was not exchanged; instead value was used as leverage. Work with your financial planner to create a strategy and timeline for the growth you desire so you can accomplish your goals with confidence.
- Looks — Renters will pay more for nicer houses in nicer neighborhoods but those properties cost more to purchase. As a rule of thumb, don’t fall in love with the property; do fall in love with the deal. Good deals will help your retirement grow more than a beautiful house will.
All examples are for educational purposes only, and should NOT be construed as investment advice. Always contact a qualified tax attorney or advisor prior to making any financial decision.
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