Investment Property 101: Understanding the Basics of Rentals

Investing in rental properties has long been one of the most reliable ways to build wealth. Whether you’re looking for an extra source of income or a long-term investment, rental properties offer a range of opportunities. 

It is a viable source of additional or even passive income because of the opportunities it presents. According to a survey conducted by the Philippine Statistics Authority in 2020, 10.8 percent of the total number of households in Metro Manila rent the housing unit and lot they live in. Although this might seem like a small percentage, the market for rental properties in the country’s capital is still significant.

But like any investment, rental property requires careful planning and knowledge to succeed. This guide will walk you through the different types of rental properties, what you need to consider before purchasing, and the ins and outs of becoming a landlord. By the end, you’ll feel ready to take the plunge into this lucrative field.

Types of Rental Property Investment

When thinking about investing in rental properties, the first step is understanding the different types available. Each property type comes with its own unique set of benefits and challenges, whether it’s a condo unit or house and lot, so it’s essential to know what you’re getting into.

Single-Family Homes

Single-family homes are often the first choice for new investors. These are standalone properties meant for one family, making them easier to manage compared to multi-family units. 

Single-family homes generally attract long-term tenants who take better care of the property since they treat it like their own. The turnover rate tends to be lower, but you only have one source of rent, so if the property sits vacant, there’s no backup income.

Multi-Family Rental Properties

If you’re looking for a property that can generate multiple income streams, multi-family properties are a solid option. Duplexes, triplexes, and apartment buildings allow you to collect rent from several tenants. 

The benefit here is obvious: even if one unit is vacant, the others can still bring in rent. On the downside, managing multiple tenants can be more time-consuming, requiring a well-thought-out rental property investment strategy. Additionally, these properties often come with higher upfront costs and maintenance needs.

Condominiums

Condos offer an affordable entry into rental property investment, especially in high-demand urban areas. With condos, you don’t have to worry about external maintenance, as that’s handled by the homeowner’s association (HOA). 

However, you’ll need to pay HOA fees, which can cut into your profits. Additionally, some associations have rules limiting how many units can be rented out, so make sure to check before purchasing.

Foreclosures

Investing in foreclosed properties can be risky but potentially rewarding if you know what you’re doing. These properties are often sold at below-market prices, which can lead to significant profit margins after you renovate and rent them out. 

However, foreclosed homes often require extensive repairs, and buying them usually involves navigating complicated legal and financial waters. Learning how much you’d spend to renovate a house in the Philippines before buying a foreclosed property can save you from unexpected expenses and problems in the future.

Commercial Properties

For seasoned investors, commercial properties—like office spaces, retail stores, or warehouses—can yield higher returns than residential rentals. The leases for commercial properties are often longer, and tenants typically cover a portion of the maintenance costs. However, these properties come with higher risks, especially during economic downturns, and often require more capital and experience to manage effectively.

What to Consider When Purchasing a Rental Property as an Investment

Now that you’re familiar with the types of rental properties available, let’s dive into the key factors you need to consider when purchasing one as an investment. The success of your rental property investment largely depends on these considerations.

Location

You’ve probably heard it before: “Location, location, location.” It’s a cliché but for a good reason. The location of your rental property is one of the most critical factors in determining its success. 

Properties in desirable neighborhoods tend to appreciate more over time and can attract high-quality tenants who are willing to pay higher rent. Look for areas with low crime rates, good schools, and proximity to amenities like shopping, parks, and public transportation.

Financing Options

Financing a rental property isn’t the same as financing your personal home. Lenders often view rental properties as riskier, which means you may need a higher down payment—usually 20% or more—and face higher interest rates. 

It’s crucial to shop around for the best home loan rates and consider other financing options to make your investment more manageable. One of the trusted institutions that offers competitive interest rates and flexible payment terms is RCBC. With tailored financing options and reliable customer support, RCBC simplifies the loan process, even listing the different housing loan requirements and helping investors secure properties.

Property Taxes

Property taxes can significantly impact your bottom line. D, so don’t overlook them because h. hHigh property taxes can eat into your rental income., so Instead, research the tax rates in the area you’re considering. However, keep in mind that high property taxes aren’t always a deal-breaker, especially if the property is in a high-demand location with a strong rental market. So, research the tax rates in the area you’re considering.

Amenities

Modern tenants look for more than just four walls and a roof—they want amenities. Features like on-site laundry, parking, and even green spaces can make your property more attractive. If your property is in an apartment building or a condo, amenities like a gym or pool could set you apart from the competition.

Future Development in the Area

It’s also wise to think about the future of the area where you’re investing in a rental property. Are there plans for new schools, shopping centers, or public transport in the neighborhood? 

Future developments can increase property values and make your rental more appealing. Conversely, if there are plans for construction that could lead to noise and congestion, that might lower the property’s appeal temporarily or long-term.

Vacancy Rates

Vacancy rates are another crucial factor in choosing a rental property. High vacancy rates in the area could signal trouble. It could mean the neighborhood isn’t in demand, or there may be an oversupply of rental properties. Low vacancy rates, on the other hand, indicate strong rental demand, which is a good sign for your investment.

Average Rent

Before you invest, make sure to research the average rent for similar properties in the area. You want to ensure that the rent you can charge will cover your expenses—like the mortgage, taxes, insurance, and maintenance—and still leave you with a profit. If the average rent in the area is too low, you might struggle to make the investment work.

Employment Opportunities and Local Schools

Areas with strong job markets and reputable schools tend to attract more tenants. When people move to an area for work or to raise a family, they often look for rentals close to their job or school. Proximity to growing industries or well-rated schools can keep your rental property investment in demand and help ensure stable, long-term tenants.

Becoming a Landlord

Learning how to invest in real estate in the Philippines is just the first step. Once you’ve made the investment, you’ll need to manage the property, deal with tenants, and ensure that you’re compliant with local laws. Becoming a landlord comes with a unique set of responsibilities, but if you handle them correctly, it can be a rewarding endeavor.

Property Maintenance

One of your most critical responsibilities as a landlord is maintaining your investment property. This doesn’t just include fixing things when they break; you’ll also need to perform regular upkeep, such as lawn care, cleaning common areas, and making sure the plumbing and electrical systems are in good shape. A well-maintained property will not only attract better tenants but also retain its value over time.

Tenant Control

Managing tenants can be one of the most challenging aspects of being a landlord. You’ll need to screen potential tenants to ensure they’re reliable and financially stable. 

Once they’ve moved in, maintaining open communication and addressing any concerns promptly can help foster a positive landlord-tenant relationship. On the flip side, you’ll also need to handle evictions if tenants don’t pay rent or violate the lease, which can be a difficult process.

Financial Management

Being a landlord isn’t just about collecting rent; it’s about managing the financial side of things, too. You’ll need to keep track of income and expenses, pay property taxes, and set aside money for repairs and emergencies. Many landlords find it helpful to use property management software to stay organized and ensure they’re maximizing profits.

Landlord-Tenant Law Compliance

Finally, as a landlord, you need to be familiar with local landlord-tenant laws. These laws cover everything from how much notice you need to give before entering a tenant’s unit to how much you can charge for a security deposit. Failing to comply with these laws can lead to legal trouble, so it’s essential to stay informed and consult a lawyer if necessary.

Is Rental Property a Good Investment?

After all the discussion, the question remains: is rental property a good investment? 

Investing in rental property can be a path to financial freedom, but it’s not without its challenges. From choosing the right type of property to managing tenants and maintaining the property, there’s a lot to consider. However, with careful planning, a strategic approach, and a willingness to put in the effort, you can build a steady stream of income and grow your wealth over time.

Now that you know the ins and outs of rental property investment, the next step is up to you. Are you ready to start your journey? Whether you decide to invest in a single-family home, a multi-family property, or even a commercial space, the potential rewards can be well worth the effort.