Investing in a rental property is a good way to secure an additional income stream. But as with any investment, there are pros and cons of rental properties you need to know about before diving in.
Benefits of rental properties
As a rental property owner, you'll have an opportunity to secure a steady income stream, all the while building equity and letting your investment property appreciate in value. And, if you hire a management company, you won't have to do the usual work associated with being a landlord. Rather, your management company will address tenant issues, arrange for maintenance and repairs, and do the numerous things you may not personally have time or patience for.
Another good reason to purchase a rental property? You'll reap a number of tax benefits. Property owners with tenants can deduct numerous expenses associated with generating rental income, including home repairs, improvements, and depreciation. There's also the option to deduct mortgage interest. And if you hire someone to manage that property, that expense is deductible as well.
Cons of rental properties
Though buying a rental property can be a solid real estate investment, there are a few downsides to consider as well. For one thing, the amount of money you need to sink into that property could leave you fairly illiquid. And while you'd hope to see some solid property value growth over time, that may not happen. As such, you could get stuck in a scenario where your money is tied up in a home you can't sell, or can't rent out for top dollar -- a home that keeps costing you additional money in maintenance and repairs.
Another issue with owning a rental property is that your costs associated with retaining it could rise over time. Property taxes have the potential to climb, homeowners insurance rates can go up, and maintenance and repairs can grow increasingly costly as a home ages or is used.
Furthermore, when you rent your property to someone else, there's always the risk that that person will damage your home or do something to decrease its value. You also can't discount the possibility of your tenant failing to pay rent on time, thereby potentially creating cash flow issues for you if you're dependent on that income to keep up with your ownership costs. And while screening tenants thoroughly and collecting a security deposit can help mitigate these risks, they don't eliminate them completely.
Another thing: Unless you buy a rental property in a high-demand area, you may have to deal with vacancies in between leases. That, in turn, could leave you having to foot the entire cost of owning that property yourself without the rental income to offset it.
And of course, as is the case with owning any type of home, there's also the chance that your rental property could decline in value. Neighborhoods can change over time -- sometimes for the worse. You'll need to really vet the area you're looking in before making that investment.
Finally, unless you're planning to hire a management company, you'll need to deal with the work of being a landlord. That could mean rushing over to that property at 2 a.m. to fix a leak or having to chase down the people who rent your property for your money.
Should you buy a rental property?
Clearly, there are pros and cons to buying a rental property. If you're thinking of going that route, do a few key things first:
- Find a stable neighborhood or one with the potential for solid growth.
- Figure out if you're capable of being a landlord yourself, and if not, factor the cost of hiring a property manager into your expenses.
- Determine how buying that property will affect your cash flow.
- See what mortgage interest rates you qualify for.
- Make sure you're financially equipped for the unplanned expenses that could come with owning another property.
Rental properties often work out very well for real estate investors. Just make sure you understand exactly what you're getting into -- and giving up -- to buy one.