An Overview
Do you dream of owning an investment property? Maybe even several? The idea of a steady monthly income is appealing and investing in the right property can be profitable, but it’s not without risks. We’re here to breakdown the pros and cons of owning an investment/rental property.
There are a number of advantages and disadvantages to buying a property and then renting it out. Talk to your realtor, accountant, lawyer, mortgage broker or other financial experts about how it may affect your taxes and financial situation.
Consider the following information if you’re thinking about diversifying into the rental business.
The Pros and Cons
Pros:
- Regular Monthly Income: Rent collected, minus your expenses, means a steady, predictable cash flow that can help you pay off your mortgage. This makes a rental property an excellent option if you are looking to diversify your income sources and investments.
- Property Appreciation: While we can’t guarantee that the price of your property will increase right away. Historically speaking, real estate prices have increased over the long term. Renting out your property now allows you to hold onto your property in case it appreciates, giving you the option to sell when the time is right. The amount of appreciation is going to vary by market.
- Tax Deduction: As a landlord, you can significantly reduce the taxes you owe the government. This is because certain property expenses, including but not limited to property taxes, insurance, management fees, maintenance costs, utility bills (when included in the rent), and mortgage interest, can be deducted from your rental income.
Cons:
- Liquidity Issues: Although valuable, selling a rental property when you are ready can be quite difficult as real estate is not a liquid asset and may take considerable time, depending on market conditions.
- Bad Tenants: Despite your thorough background checks on prospective renters, you could wind up with tenants who are not ideal. For example, they could be needy or demanding, pay late, forget to turn off the water, and so on. This is all part of the process of managing your own rental property.
- Unexpected Costs: As all homeowners know, running a house can be expensive. Unfortunately, even if you rent it out, it doesn’t always remove these expenses! Even with good tenants, water heaters can break, leaks start, termites gnaw. There are laws that regulate the conditions landlords must maintain for their renters and be prepared to upkeep them.
Bottom Line
Buying a rental property can be a great idea and smart investment if you are in great financial shape and looking to diversify your income sources. But if you are not ready to face the risks and financial costs that may come with it, the liquidity issues, and the rest of the challenges we’ve seen in the pros and cons, then the idea might not be right for you.