Living off rental income ?

By Dolores Pérez Islas
Ceo SILMEXICO

It is common that when talking about real estate investment; the immediate answer is that related to income. The phrase “Live off your rental income” is the most frequent not only in Mexico. However, there are pros and cons, as well as other investment strategies with which you could also get, one day, to live off rental income.

In this post, I will talk about some elements that represent constant and long-term profits.
Investing in real estate consists of buying a home and renting it to obtain a month-to-month rental, the price of the property appreciates over time, this represents a certain stability in the flow of income from rentals, very little correlation with fluctuations in income. In a real estate investment, the possession of a tangible asset may one day be used for one’s own use. Another important element is that it is not necessary to have all the investment capital at one time since there are multiple sources of financing with low-interest rates.
Investment in real estate can be low, this will depend on the type of income portfolio. In residential rents such as student housing and low-middle-profile sectors, liquidity can be lower and quite dependent on external factors such as lack of return to school or the holiday season. The same applies to commercial income with very high vacancy rates. When investing in any of these assets, it is very important to consider locations for residential leases that allow diversification of the type of rents, such as those in business or tourist cities where there is feasibility of income from rentals on short-rental platforms such as Airbnb or Home Away. As for commercial leases, the location is very important, but generally the better located the capital property is the investment, if the property does not have the best location an important element is the long-term lease, generally this type of lease is five plus five or ten plus five years. A financial pro forma will help measure fluctuations and ensure annual increases that provide conservative liquidity, but finally the vacancy rate will remain low and also in this type of lease it is always feasible to mortgage, sell or transfer the property.
Considering some points of view that speak of the importance of diversifying the rental portfolio, I think that it is financially healthy to have properties in capitalization of three types of rents, but this will depend on the profile of the investor. And I mean:
1) middle / upper class residential with potential for long and short leases;
2) commercial in streets with high pedestrian vehicular traffic that is not limited to a specific industry;
3) international properties such as beach or business destinations where capital gains are very dynamic and exchange rates increase returns.
There may be a need, in many cases, for leverage to carry out the investment, but it is also feasible to sell with income, here the remodeling and the property’s polygon of influence will play a very important role, but it can be sold in the first years of the mortgage.
Living from the rents seems difficult to calculate the real profitability of the property due to the multiple expenses including taxes that it requires both for its purchase and for its maintenance. But if the investor is backed with the appropriate corporate, fiscal, financial and maintenance instruments, it is feasible to have an important flow of returns that can be the answer to greater financial independence based on correct real estate strategies.

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