The rental market can be lucrative for property investors. Buy the right properties, find some decent tenants, and watch the money roll in, right?
Wrong. Unless you have a good grasp of how to manage an investment property, there is a lot that can go wrong. Read on to learn more.
Pros of Owning Rental Properties
There are some great reasons to invest in the real estate sector, whether you are hoping to fill a unit with tenants or just want to see a return on your capital investment.
- Potential for Strong Investment Returns
When managed effectively, rental properties can provide a steady stream of passive income. This income is generated by monthly rental payments – any income that exceeds the property’s expenses is profit.
- Tax Benefits
Owning rental properties also offers various tax benefits and you can defer real estate taxes to boost your cash flow. Expenses related to the property, such as mortgage interest, property taxes, insurance, and repairs, can be deducted from your taxable rental income. Speak to a tax accountant to minimize your tax exposure.
- Appreciation of Property Value
All properties have the potential to appreciate if the market is strong, which means your investment property may become more valuable, allowing you to sell it for a profit.
- Diversification of Investment Portfolio
Owning rental properties is a good way to diversify your investment portfolio. By investing in different assets, you can reduce the risk associated with investing in a single asset class. Rental properties can offer stability to your overall investment strategy by acting as a hedge against inflation.
- Control over Investment
Unlike some other forms of investments, owning rental properties gives you a level of control over your investment. You can choose the location, type of property, and target tenant market. This control allows you to optimize your rental property investment according to your specific investment goals and risk tolerance.
Cons of Owning Rental Properties
Now we get to the disadvantages, which bear some consideration before you leap into real estate investment.
- Lack of Liquidity
A rental property is an illiquid investment – unlike stocks or bonds that can be easily bought or sold, real estate investments can take time to sell. If you need money, it may be challenging to convert your rental property investment into cash quickly.
- Management Responsibilities
Owning rental properties means you have to manage them. This includes finding tenants, screening applicants, collecting rent, addressing maintenance issues, and ensuring compliance with local regulations. Unless you hire a property management company, you will be responsible for these tasks, and not everyone has the time or the inclination to be a property manager.
- Dealing with Difficult Tenants
While many tenants are responsible and respectful, there is always the possibility of dealing with difficult tenants. This can include late or non-payment of rent, property damage, or even legal disputes. Managing difficult tenants can be stressful and may require legal action, which can add additional costs and time to your investment.
- Maintenance Costs
Maintenance and upkeep costs, from routine repairs to major renovations, can eat into your rental income and affect your overall return on investment. It is important to budget for these expenses and have a contingency plan in place.
- Market Volatility
The real estate market has ups and downs and rental property values can be influenced by economic conditions, interest rates, and local factors. Changes in the market can affect your rental income and property value.
Rental properties are a good investment if you understand the risks. Always make sure you research the sector thoroughly before buying a property.