Becoming a landlord has its perks, but for some, it's not all it's cracked up to be. Compare the pros and cons of being a landlord before buying rental property so you can determine whether owning rental real estate is the right move for you.
Pros of being a landlord
Rental income is by far one of the greatest benefits of owning investment properties. If the rental income exceeds the property's holding expenses (like property taxes, insurance, repairs, and maintenance) as well as financing cost, the landlord receives a check each month creating a consistent source of income for as long as the property is occupied and the tenant pays on time.
Another huge benefit of owning a rental property is the tax benefits. There are a slew of tax deductions available for investment properties including:
- Business deductions (if the property is owned by a company or LLC).
- The cost of the property, including property insurance, property taxes, and certain maintenance expenses or repairs.
- Mortgage interest
Many of these benefits are available only to rental real estate investors and can equate to significant tax savings over time.
Equity and appreciation of the property
While not always the case, in most instances, real estate appreciates, or increases in value, over time. Depending on where the rental real estate is owned, there is a chance the landlord can benefit from the future appreciation of the property in addition to the extra income it produced from being rented.
If the rental income exceeds the property's expenses and financing cost, the tenant's rental payment pays the mortgage, lowering the principal balance each month it's rented. That means the landlord is building equity in the home without having to pay the mortgage or interest themselves.
Cons of being a landlord
While income from a rental is considered passive, rental property is far from being a hands-off, passive investment. A lot of work goes into owning a rental property. Landlord responsibilities include:
- Advertising vacancies and showing the property
- Screening tenants
- Collecting deposits and executing leases
- Tenant communication
- Coordinating maintenance and repairs
- Collecting rent
- Filing evictions, if necessary
One rental property may not require a substantial amount of work, but multiple rental units will. Some landlords choose to outsource the ongoing time commitment of managing a rental property to a property management company for a flat monthly fee or percentage of the rental income. Whether you hire a property manager or manage your rentals yourself, there is a definite time commitment to investing in rental property.
Risk and liability of renting a property
Renting a property to a tenant opens up the possibility of certain risks and liability, like litigation from a tenant getting injured on your property or failure to comply with your state's tenant-landlord laws. On the flip side, you could find yourself having to pursue damages against a tenant because they trashed your property after you had to evict.
While there are ways to mitigate risk, like having an adequate liability policy for the property and owning each property in an individual company, it still is a risk. Stay up to date on federal, state, and local rental laws, and get adequate coverage to help better protect yourself.
Maintenance and repairs
Properties need to be maintained and kept up over time. Tenants will cause damage or general wear and tear on your property, and eventually, items will need to be replaced, repaired, or updated.
Occasionally, unexpected expenses will arise. Just a few examples include:
- A pipe bursting, flooding the property.
- The roof needing to be replaced sooner than anticipated.
- The A/C or furnace breaking in the dead of winter or summer.
- Finding the property trashed after a tenant moves out.
Set aside a portion of your rental income for ongoing maintenance and repairs, and be prepared to coordinate with tenants, contractors, plumbers, or repair people to fix the issues.
Rental properties are best treated as long-term investments, as the benefits are maximized the longer the property is held. This means your money is tied up in a property for a long period of time. If your property has equity, you do have the opportunity to leverage a portion of that equity, but there is far less liquidity in a rental property than in alternative investments like real estate investment trusts (REITs).
Everything is great when a property is rented, but when a property is vacant, you as the landlord are still responsible for paying the property's expenses and financing costs. If the property is vacant longer than expected, it may be a financial burden to maintain the cost of holding the property.