Owning rental property is one of the most reliable ways to build wealth.
Yet nothing comes without problems. If you want to build wealth with rental property, you’ll be taking on a whole host of new responsibilities. So it’s important to understand what you’re jumping into before making any decisions or purchasing any properties.
Here are some of the pros and cons of owning rental property.
Pro: Recurring Income
Recurring revenue is one of the most obvious advantages to owning a rental home.
You’ll often see rental income referred to as “passive” income. In truth, you’ll either need to stay on top of vacancy rates, retention, maintenance, and the financial side of handling a rental property—or you’ll need to pay a property management company 10% to 15% of your rent to do this job for you.
While rental income may not be truly passive, it certainly requires a smaller investment of time than most jobs do.
Pro: A Stable Investment
Everyone needs a place to live.
When you invest in rental housing, you invest in an asset that is virtually recession-proof if you manage it correctly. Even when the property sits vacant it will be earning equity in most cases. And if trends continue, the property will appreciate in value rather than depreciate as well.
These are the facts that make real estatement an intelligent addition to virtually any portfolio.
See also: DSCR Loans
Pro: Tax Benefits
While you’ll want to contact a tax professional for specifics, owning a rental property comes with tax benefits.
Your biggest benefit will be the ability to write off certain expenses. These include repair expenses. You can write off mortgage interest as well. As of today, you can deduct the interest you paid on the first $750,000 of your mortgages. For married couples filing separately, the limit is $375,000. It is always wise to consult a tax specialist.
See also: Using Rental Income to Qualify for a Mortgage: Unlocking New Home Opportunities with Alex Doce
Con: Tenants Can be Troublesome
Everyone has heard at least one horror story about a tenant who completely destroyed a property.
Everyone’s heard about tenants who won’t pay rent and who take months, even years, to evict. We’ve all heard of tenants who engage in criminal activity on properties, or whose lifestyle attracts pets. These are the kinds of stories that make people afraid to invest in real estate.
Fortunately, the vast majority of tenants just want to quietly enjoy a nice living space.
Con: Repairs Are Inescapable
If you’ve ever owned and lived in your own home before then you know that any building is a delicate system prone to problems.
Pipes get backed up, wood rots, paint chips, and appliances break down. There will be days where you might feel the repairs are literally never-ending. That doesn’t even count damage caused by disasters like hurricanes or tornados.
Repairs are the reason why most lenders want to see proof that a prospective investor has a cash reserve for each property owned, to handle any problems that arise. Most states require landlords to ensure their properties adhere to a minimum standard of habitability, and most tenants expect repairs to happen promptly and in a satisfactory manner in compliance with local building and zoning codes.
Con: Laws Can Be Tricky
When you invest in rental property you’ll begin engaging with brand new sets of laws you’ve never had to deal with before.
You’ll need to make sure your advertising and lease adhere to Fair Housing laws. You’ll need to understand when you can and can’t enter the unit. And if your lease isn’t structured correctly, you might find it impossible to evict a problem tenant later, which means you might begin losing money hand over fist.
Most landlords require the services of either a real estate lawyer or a property manager to ensure they’re adhering to all applicable laws and regulations.
How to Maximize Pros & Minimize Cons
Millions of people enjoy success with their rental properties, and you can too.
The key is to mitigate the risks and the cons while maximizing your ability to profit from your properties. To do this, you’ll need to take four steps.
- Calculate the projected ROI on your investment property before making any offers. The number should be both realistic and conservative, because you have no way of knowing what might go wrong before you begin.
- Screen tenants before accepting them as renters. Many screening software programs, services, and lists exist to help ensure, at a minimum, that tenants don’t have a history of eviction or criminal conduct. You should also require proof of income to ensure they can pay the rent.
- Prioritize retention over high rents. It can be tempting to push the rent as high as you think the market will bear, but you can lose months of revenue that way. Renters consistently say lower rent is their #1 priority and the number one reason you move. Every month that a property sits idle represents a 12% reduction in your annual revenue. Allow the situation to persist for too long, and you’ll wipe out any gains you might have achieved with the higher rent. You’ll build your wealth by consistently investing in new properties while enjoying modest profits on existing ones, and by keeping all of those units filled for as long as possible.
- Maximize profits with the right loan. High loan fees and interest rates can eat into your potential profits. You can control these expenses simply by shopping around for the right mortgage and the right renter.
Looking for an investment property loan? Alex Doce can help match you with the right loans and will help you build, grow, and maximize your revenue by ensuring the loan is as affordable as possible. Discuss your options by scheduling a consultation today!
