Investing in rental apartments can be a great opportunity to increase your assets and capital. However, although we are in one of the best times to do so due to the high demand in the sector, it is important to know all the advantages it brings, but also its drawbacks.
Do you want to know if investing in rental apartments is a good idea? Or how to calculate the profitability of a rented property? Keep reading, because I answer these and other questions so that you can make the best decisions about your real estate assets and investments.
Investing in rental apartments, is it worth it?
Buying a property to rent it out later can be an excellent investment, but before you take the plunge, it is important to know the market, as this will help you minimize potential risks.
Thus, investing in apartments for rent will be profitable as long as you have patience and put in the effort and time. Remember also that, in addition to the initial investment and the mortgage, you will have to face other fixed and maintenance costs: IBI (Property Tax), garbage tax, levies, repairs, community fees if it is a building, home and/or non-payment insurance…
Therefore, the rent you collect for renting the property should be adequate so that, once the expenses and the mortgage payment have been paid, you have profits (Cash Flow) that you can save or invest.
Advantages of investing in rental housing
- Recurring income. Investing in rental apartments allows you to earn extra money each month that you can use to pay your mortgage, to put towards your retirement, to deal with unforeseen events, etc.
- Speed. Renting is generally much faster than selling. In fact, in high-demand cities, it only takes hours or days to rent a home.
- High performance and demand. We are living in one of the best times to invest in rental housing, and if you buy a property in a city with high demand, the profitability can be high. In addition, it is the preferred option for the general population, as they find it much more affordable to live in a rented apartment than a purchased one.
Disadvantages of investing in rental apartments
- Medium-term benefits: Investing in apartments for rent does not offer instant liquidity, but rather in the medium or long term.
- Lack of tenants. It may happen that the property cannot be rented immediately, which means a lack of income or even a loss of money if the extra fixed costs continue to be paid (IBI, insurance, mortgage, etc.).
How is the profitability of a rented property calculated?
Calculating the profitability of a rented property is very simple and you can find out by applying the following formula:
Profitability = (Annual rental income – Fixed and maintenance costs) / (Property price) x 100
For example, imagine that you own a flat worth 200,000 euros and the monthly rent is 900 euros, i.e. 10,800 euros per year. On the other hand, the fixed and maintenance costs amount to 750 euros per year. What would be your profitability?
10800 – 750 /200000 x 100 = 5,025%
What is the average profitability of a rental?
The gross rental yield of a home in the USA reached 6.9% at the end of 2021. However, this figure can vary considerably from one city to another. For example, while in Murcia and Lleida it exceeds 8%, in Palma de Mallorca or San Sebastián it is below 4.5%.
Investing in rental apartments: tips and considerations to take into account
Analyze the market and know the urban rental regulations
Before investing in apartments for rent, analyse the market and get information and advice on the rules for urban leasing. If necessary, you can hire a legal advisor.
Likewise, be forward-thinking. Study your financial capacity and calculate all the expenses you will incur, from the initial investment to the mortgage and recurring fixed and maintenance costs.
Investing in the right property
If you decide to buy a home to rent it out later, it is important to take two factors into account:
- Condition of the property. Choose a property that requires minimal renovation. This way you will reduce the associated costs.
- Property location. Choose a property in an up-and-coming area, where there are also nearby services, as this will help to promote its rental. Of course, before signing the purchase, consider various options to get the one that interests you the most.
Setting the right rental price for your apartment
Set a fair rent based on various parameters, such as the expenses you will have to pay, the neighbourhood in which your home is located and similar rental prices, the profile of your potential tenants, etc.
To do this, you have the option of carrying out a study on your own or, if you prefer, enlist the help of a real estate agent.
I hope this post about investing in rental apartments has been useful to you and, if you decide to start doing it, don’t hesitate to continue reading the blog for more advice on real estate assets.
Towards your financial freedom.