For current income, tax shelter, and appreciation potential few investments match direct ownership of rental property. However, you must be willing to take on the responsibilities of being a landlord in return for the possible rewards.
Some investors dabble in residential properties–they buy houses to rent out or they buy small apartment buildings. Those kinds of properties, though, frequently lead to hassles with tenants, even if you hire a property manager.
By contrast, renting to commercial tenants may be less demanding. Nevertheless, investment property always will require more time and effort than owning stocks or bonds or mutual funds.
Whichever type of property you buy you should always “kick the tires” first:
* Walk through the building to assess its physical condition.
* Then, talk with the existing tenants. See how stable they appear to be and make a judgment about whether they’ll stay there, paying the rent regularly.
After you have determined on a purchase price you need to decide how much debt to carry on the property, if any. An all-cash purchase will reduce your risk and maximize your income because you won’t have to make debt service payments. On the other hand, taking out a large mortgage will maximize your gains if the property appreciates in value: if you buy a $1 million building with a $100,000 down payment you’ll have a 100 percent profit if the property appreciates just 10 percent, to $1.1 million.
Start by calculating the cash flow (income over expenses) you’re likely to receive with an all-cash purchase. Assuming you don’t need the extra cash flow, which may be largely taxable, you should figure out how large a mortgage you’ll need to fully offset rental income with interest deductions. This will spare you a current tax obligation while giving you some leverage if the property gains value.