Is It Smart to Get an Investment Property? Key Factors to Consider Before Buying

Buying a rental property can be an effective way to build long-term wealth, but becoming a landlord also comes with financial responsibilities, ongoing maintenance and the challenge of managing tenants. While rental income, property appreciation and tax benefits can make Real Estate attractive, the investment may not be suitable for everyone.

According to Douglas Boneparth, a certified financial planner and founder of Bone Fide Wealth, the decision to purchase an investment property depends on an individual’s financial position, investment goals and willingness to manage the responsibilities of being a landlord.

In his advice featured in CNN’s Savings Challenge, Boneparth highlights the importance of looking beyond the potential returns and carefully evaluating the financial and practical demands of owning rental property.

Key Highlights

• Rental properties can generate income and build long-term wealth through property appreciation.
• Tax benefits, including depreciation, can make real estate investment attractive.
• Landlords must manage tenants, vacancies, repairs and unexpected maintenance expenses.
• Investors should calculate realistic costs and potential returns before purchasing a property.
• Keeping credit card utilisation below 30% can help improve credit scores.

Is Buying an Investment Property Worth It?

There is no universal answer to whether purchasing an investment property is a smart financial decision. Boneparth explains that real estate can be a meaningful part of a wealth-building strategy, but its suitability depends on the investor’s circumstances.

Rental income can provide a regular source of cash flow, while property appreciation may increase the value of the investment over time. Investors may also benefit from tax advantages such as depreciation, depending on applicable tax rules and their individual circumstances.

However, potential returns should not be the only consideration. Investors need to understand the costs of owning and maintaining a property, along with the time required to manage it.

Being a Landlord Is More Than Collecting Rent

One of the biggest misconceptions about rental property investment is that it generates passive income without requiring much effort. In reality, owning a rental property can involve considerable work.

Landlords are responsible for managing tenants, handling maintenance requests, arranging repairs and dealing with periods when a property remains vacant. Unexpected expenses can also affect the financial returns of an investment.

For example, a property may require urgent plumbing or electrical repairs, while a tenant leaving unexpectedly could result in several weeks or months without rental income. These situations can create financial pressure, particularly for investors who have limited savings.

Therefore, anyone considering a rental property should evaluate whether they have the time, resources and willingness to handle these responsibilities.

Calculate the Real Cost Before Buying

Boneparth advises potential investors to examine the financial calculations carefully rather than relying on optimistic projections. A property that appears profitable on paper may deliver weaker returns once all expenses are included.

Investors should consider the following costs before making a purchase:

• Mortgage payments: Monthly loan repayments can represent a significant portion of rental income.
• Property maintenance: Regular upkeep and unexpected repairs can reduce profitability.
• Vacancy periods: A property may remain unoccupied between tenants, resulting in lost rental income.
• Property management: Hiring a professional manager can add to operating expenses.
• Insurance and taxes: These recurring costs must be included when calculating potential returns.
• Emergency reserves: Investors should maintain savings to cover unexpected expenses and periods of reduced income.

After accounting for these expenses, investors can estimate the property’s realistic cash flow. If the investment requires stretching personal finances or depends on consistently optimistic assumptions, it may not be worth pursuing.

Rental Income, Appreciation and Tax Benefits

Investment properties offer several potential sources of financial returns. Rental income can provide recurring cash flow, while appreciation may increase the property’s market value over the long term.

Another potential advantage is depreciation, which may allow eligible property owners to claim certain tax deductions under applicable rules. However, tax treatment depends on the property, ownership structure and relevant tax regulations.

These benefits can make real estate a useful component of a diversified investment strategy. Nevertheless, property values can decline, rental demand can weaken and expenses can rise. Investors should avoid assuming that property prices or rental income will always increase.

When Should You Avoid Buying an Investment Property?

An investment property may not be appropriate if the purchase would place excessive pressure on personal finances. Investors who need nearly all their available savings for the down payment, mortgage payments and initial repairs may have limited flexibility when unexpected costs arise.

It may also be unsuitable for people who do not want the responsibilities associated with managing tenants and maintaining a property. Although professional property management can reduce the workload, it introduces another expense that must be included in the investment calculation.

The central advice from Boneparth is to let realistic financial calculations guide the decision. If the numbers work and the investor is comfortable with the responsibilities, rental property can be a legitimate wealth-building option.

Tip of the Week: Simple Ways to Improve Your Credit Score

Credit scores play an important role in financial decisions, particularly when applying for loans. A stronger Credit Score can improve the chances of loan approval and help borrowers qualify for lower interest rates, potentially reducing monthly payments.

One way to improve a credit score is to reduce credit card utilisation. This measures the percentage of available credit being used across credit cards.

Understand Your Credit Utilisation Ratio

For example, suppose someone has three credit cards with a combined credit limit of $30,000 and outstanding balances totalling $15,000. Their credit utilisation ratio would be 50%.

If the combined outstanding balance falls to $5,000 while the total credit limit remains unchanged, the utilisation ratio drops to approximately 17%.

Keeping credit utilisation below 30% is generally recommended, although a lower ratio can be beneficial. Paying down outstanding balances is one practical way to reduce utilisation.

Practical Ways to Lower Credit Card Utilisation

• Pay down outstanding balances: Reducing credit card debt lowers the proportion of available credit being used.
• Make payments on time: Consistent payments help maintain a positive credit history.
• Avoid unnecessary spending: Limiting new credit card purchases can prevent balances from increasing.
• Monitor credit reports: Regularly checking credit information can help identify errors and track changes.
• Consider payment timing: Paying balances before the card issuer reports them may help reduce the utilisation figure reflected in credit records.

Credit utilisation is only one factor in calculating a credit score. Payment history, length of credit history, credit mix and new credit applications can also influence the overall score.

Conclusion

Buying an investment property can help build wealth through rental income, appreciation and potential tax benefits. However, it also involves financial risks and ongoing responsibilities that investors should not underestimate.

Before purchasing a property, prospective landlords should calculate realistic returns, account for vacancies and maintenance costs, and ensure they have enough financial reserves. As Douglas Boneparth advises, real estate can be a worthwhile investment when the numbers work and the investor is prepared for the responsibilities. If the purchase depends on overly optimistic assumptions or stretches personal finances, waiting may be the more sensible decision.