Putting money into a rental property and finding good tenants can be a great way to make money without doing anything.
When talking about investing in real estate, there is so much information out there that it’s easy to feel overwhelmed. Investing in property can be stressful and take a lot of time, but if you do it right, it can be one of the best ways to get to financial independence quickly.
Just like with any other investment, it’s important to know the pros and cons of owning a rental property. When you know the pros and cons of investing in rental property, you can figure out if this is a good choice for your personal situation and long-term financial goals.
Rental Property Investment: Overview
It may sound like a good idea to buy a house or apartment to rent out for money. But there are good and bad times when you buy a rental property to make money and make your money grow over time. For example, the housing market can change based on where it is, how much supply and demand there is, and how the economy is doing.
Due to the real risks involved, for a rental property to be really profitable from a financial point of view, the return you get should be higher than what you could get from safe investments like bonds and dividend-paying blue-chip stocks. On the personal side, not everyone has the skills to run a business and take care of tenants.
Rental Property Benefits
Rental Income
The money you get from renters is the most immediate benefit of investing in rental properties. In an ideal situation, your rental income should cover your mortgage and/or the costs of running the rental property. If a rental property keeps giving you a positive rental yield, you can use the extra cash you get each year to fix up the property, buy another one, or add to your investment portfolio.
Your Property’s Value Growth
If you own a rental property, you benefit from any increase in the property’s value. Property value growth is mostly caused by things outside the home, such as population growth, the economy’s health as a whole, and changes in the neighborhood.
Even though it’s not a given that property values will go up in a meaningful way, you can increase your chances of profiting from property value growth by doing research on historical pricing data and projected emerging trends for areas where you might buy a rental property before you buy.
Tax Benefits
There are a lot of tax breaks you can get if you manage and take care of a rental property. If you have a mortgage on a rental property, you can deduct the annual loan interest and any origination fees.
As long as you can show that the following costs are related to maintaining your rental property, you can deduct them from your taxes:
- Work on repairs and maintenance.
- Condition of property declines.
- Legal and management surcharges.
- Travel costs.
Stable Cash Flow
Another reason to think about buying a rental property is that the cash flow is more stable. Even though there may be ups and downs, rental property is usually a safer investment than other markets.
For example, the stock market tends to be more volatile than the real estate market. This is because there are always a lot of people looking for places to rent and not enough houses to go around. No matter how the economy is doing, people will always need homes.
Rental Property Disadvantages
Requires Active Management
There’s no way around the fact that you have to do something when you buy a rental property. Some of the things a rental property owner has to do are find good tenants, keep the property in good shape, order repairs, and do house inspections.
But if you don’t want to manage it yourself, you can give these tasks to an outside management company.
Asset Concentration
Whether you pay cash or get a loan, buying a rental property is a big step for the average investor because it means putting a lot of money into one place.
As a non-liquid and non-diversified asset, rental property is vulnerable to rapid drops in both the number of people who want to rent it and the value of the property.
Tenant Differences
Rental property owners value tenants who stay for a long time and always pay their rent on time. Unfortunately, a significant number of renters may be late with their payments or won’t pay their rent at all. If this happens to you, you might have to go through the eviction process, which can take weeks or even months.
Unforeseen Extra Expenses
The risk of unexpected costs on top of the regular costs is another bad thing about owning rental property. This could be caused by things like big repairs that come up out of the blue, which need to be done to keep the house rentable, a sudden rise in interest rates, or vacancies.
Bear in mind that even when your rental home has no renter, you still have to spend for the operational costs like real estate taxes, premiums, and HOA fees. It can also cost more money to find someone else to rent the place.
Other Factors To Consider
Whether you’re buying a home for yourself or renting it out, it’s important to keep an eye on mortgage interest rates. Most of the time, low fixed-rate mortgage debt is a good way to protect yourself from inflation. If you are a landlord, one way to deal with rising property maintenance costs due to inflation is to raise the rent from time to time.
Key Takeaway
Before venturing into the world of rental properties, it is critical to weigh the benefits and drawbacks of doing so. The importance of the pros and cons of rental property varies from person to person. It is ultimately up to you to decide whether or not to invest in rental property. If you’ve been wondering, “Is it worth it to own a rental property?” Hopefully, this article has given you some perspective to help you make an informed decision.
