Is owning a rental property worth it?
Have you ever thought about different ways to build wealth?
Owning rental property is a popular option, but is becoming a landlord worth the hassle?
HGTV makes this process seem so easy. But a 30-minute TV show can't possibly show everything involved in buying and owning rental property.
So, let's talk about the pros and cons of becoming a landlord.
- Rental income can pay for your investment
The biggest advantage of being a landlord is that you can use the rent you collect to fund your investment (in other words, pay the mortgage). You get all the benefits of property ownership. Your tenants can supply the cashflow to pay for the property. In some cases, rental income can be higher than the mortgage payment, which could allow you to have some money leftover to cover expenses and even provide an income stream.
- Tax benefits
Owning real estate can give you access to tax benefits that aren’t available to renters. You may be able to deduct certain expenses or investments related to the property. Tax specifics vary by location and by person, so you would need to do a little homework on how they apply to you.
- Passive income
Rent is usually paid monthly, which means that a rental property can provide a reliable monthly income stream that funds your lifestyle. Of course, you would still have to cover the mortgage and other expenses.
So, that’s a few “pros.” But, like any in any situation, there are also a few "cons" to consider.
- Repairs can be costly
There is a possibility that your rental property may appreciate over time. However, maintaining it can be expensive. Plumbing, HVAC, electrical, and general maintenance costs really add up. You may also need to plan for periodic updates like new appliances, fresh paint, and new carpets.
- Renters can do a lot of damage
Bad tenants can destroy a property. Broken windows, ravaged carpet, holes in the wall ... Getting references to screen potential renters might help. But you still need to have a plan in place to deal with these issues.
- If property is unoccupied, you still pay
If your rental property goes unoccupied for a few months, you are still on the hook for insurance, mortgage payments, and other bills. It’s a good idea to build a reserve of savings that you can fall back on should you have a gap in between tenants.
- Being on call 24/7
Plumbing and electrical problems don't follow a 9-to-5 schedule. As a landlord, you may be on call 24/7 for repairs or other problems. You can hire a property management service to take care of things, but that will cost you money and eat into your profits.
- Taxes and insurance expenses can skyrocket unexpectedly
As the landlord, you're responsible for paying property taxes and homeowner’s insurance. Things outside your control (like changes in the tax rules) can make those bills increase overnight. And if you have a long-term lease with your tenants, you may not be able to increase rent immediately. Until then, you’ll have to make up the difference out of your profits.
Bottom line: Owning a rental property can be a great opportunity, but it comes with many risks. Be sure that you do your homework before you jump in!