What are the Pros and Cons of Owning Rental Properties

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Rental properties are a great opportunity to grow your asset portfolio, but they can come with their fair share of headaches. If you are thinking about getting into the rental business, there are many things to consider.

Some of the major questions to consider are who will take care of the property, what responsibilities will the tenant have, does the property cash flow, do I have enough cash reserves in case something breaks? These are just a few of the things that need to be considered before purchasing a property.

Let’s take a look at a few more Pros and Cons of owning rental property.

PROS:

• Tax Advantages. Make sure to hold your rental in some form of a corporate entity and not in your own name. This will allow you to take advantage of the tax incentives that come with owning real estate and have made more millionaires than any other method of investing.
• Monthly Income. If your tenants are paying you more than your monthly expenses, then you will be making extra income each month on rent, this is called cash flow. Keep in mind that in order to have a higher rent cost, your rental will need to be clean and well-kept. You should not even consider purchasing a rental if you can’t make it cash flow at the end of the month. There are many things to consider when trying to figure out if this is possible.
• Owning a Vacation Home. If you plan on retiring somewhere other than in your current home, buying the home now and renting it out will give you a great step up when it comes that time. With so many vacation rental sites and companies today, this is easier than ever. If you can purchase this property and have it pay for itself and possibly make some extra money while you’re at it the transition to retirement will be that much simpler.
• Adding Value. With any business, it is important reinvest some of your revenue back into the business and this is no different with real estate. By setting aside some of the rent every month you can have enough to maintain the property but also make small improvements to the property allowing you to increase its value if you ever decide to sell but also demand higher rent for a higher quality property.
• Appreciation. Also known as phantom income. Chances are your property is going to appreciate over the time that you own it allowing you to sell it for a higher price at a future date or refinance the equity out allowing you to invest in more properties or other businesses.

CONS:

• Awful Tenants. Most tenants you have will not be much of a problem. They will pay their rent on time, take care of the property and be very communicative but every once in a while, you will run into that tenant that is just awful. Some may just completely destroy the property if they know they are already going to lose their security deposit. Others will just stop paying rent altogether and make you take them to court or evict them causing you to incur the associated fees. I would suggest doing a background check on any prospective tenants. There are several services that will do this for you at a minimal cost and could save you several headaches down the road.
• Landlord Responsibilities. Becoming a landlord is not a decision to be taken lightly. Accepting the responsibilities as a landlord is not a nine to five job, you could very easily find yourself fixing something that is broken at 10:00 PM on Christmas Eve, or leaving your kids birthday party because a pipe bursts and the basement floods. My suggestion to remedy this is to hire a good management company that will take this over for you, and I do put an emphasis on “Good” management company.
• Up Front Costs. You will need money up front to purchase the home, although if you are creative, there are opportunities to purchase homes with very little money up front. Reserve funds will be needed to cover the costs of repairs, unlike your home where you can put off minor repairs, your tenants will expect repairs to be completed right away. It is a good rule to set aside 8% of the monthly rent every month to cover these costs but you will need a reserve fund of your own money available to get started.
• Risk. With any investment comes risk and real estate is no exception. The risk could be something that is completely out of your control. A city could decide to put a dump right next to your rental property causing the value and desirability of your property to plummet. Your tenant could burn your property down and skip town. This doesn’t include the normal everyday things that could happen to any property. Your tenant could stop paying rent and force you to evict them. In this scenario you could live in a heavy tenant rights state and not be able to evict them and the government could just let them live there rent free and there is nothing you can do about it.
• Vacancy. There is the possibility that your rental could sit vacant for a while, this is called vacancy. You need to be able to determine the vacancy of the property before purchasing it and set aside that percentage of rent every month in order to cover that cost when it arises.

Summary

As we have discussed in the article there are many things to consider when becoming a landlord. I definitely wouldn’t discourage anyone from owning rental property because it is a great investment if you know what you are doing. There are just many factors to consider and the goal hear is to make you aware of them so that you can get a plan together and have as few surprises as possible.

Owning real estate is one of the best opportunities to become a millionaire and everyone should take advantage of the benefits, but also be prepared for the negatives. The biggest advice I can give is that the money made on a real estate deal is made on the purchase of the property no matter what you are planning to do with it. It is necessary to learn the skills of how to evaluate a property. Once you can do this you will be better suited to absorb any other mistakes.