The ultimate guide to rental property investment pros and cons.
Investing in rental properties and securing paying tenants can be a fantastic way to earn a consistent passive income. If you are considering investing in rental properties, it’s important to understand the pros and cons of doing so. This will ensure that you invest your hard-earned money in the right assets for your purposes and end goals.
When it comes to investing in property, the sheer amount of information provided to investors can seem overwhelming. Particularly if you’re new to the investment world.
Investing in rental property is a potentially stressful and drawn-out process. But taking your time is vital, as making the right choice is an excellent way to secure your financial independence in the long run.
How do you get maximum benefit from your rental? And how do you make sure the pros outweigh the cons? To help you out, we’ve outlined the basics.
What is a rental property investment?
There are several different methods by which investors invest in properties. They can purchase houses, renovate them and then flip them for a profit, invest in properties that they intend to rent out, and perform REIT investing as well.
Rental property investments refer to the purchase of properties that you intend to rent out to secure a weekly or monthly income from your tenants, either residential or commercial. The purchase of a rental property can be paid for in cash or financed with a bank mortgage in the same way that a residential home gets financed.
How to know if you’re ready to invest in rental properties
The decision to invest in rental properties is a very individual one. Your first step in assessing whether you are ready to make the move is to evaluate your personal and financial situation. You must do this before you even consider making such a significant long-term purchase.
Ask yourself these questions to gauge whether or not you are ready to invest in a rental property of your own:
- Do you understand the logistics and nuances involved in this investment?
- Is your personal cash flow capable of standing up against periods of fluctuating tenant demand and potential declines in the value of your rental property?
- Will your current or future professional, personal, and financial responsibilities hinder your ability to manage and maintain your rental property?
If you have answered ‘yes’ to the first two questions and ‘no’ to the last question, you might be ready to take the plunge.
Ensuring that your investment is profitable
The notion of buying a property to rent out may sound tempting, but it’s important to be realistic.
Buying such a property for income and long-term capital appreciation can pose its ups and downs. For example, the housing market can fluctuate continuously depending on where your property is positioned, the supply and demand for your area, and the state of the economy at large.
In terms of financial investments, in order to ensure that your rental property proves profitable, the returns you earn should be greater than what you could potentially earn through conservative investments like dividend paying blue chip stocks and bonds. Investing in property is a risk and you may have other options that yield a better ROI.
Realistically, not everyone is capable of managing rental properties and tenants either. It’s a good idea to candidly assess your own capabilities before moving ahead.
Weighing up the pros and cons
As with any investment there are pros and cons. Buying a rental property has plenty of both. It’s up to you to determine which applies to your situation, and whether the positives counteract the negatives to enough of a degree..
The pros
Regular passive income
The most obvious benefit of investing in a rental property is the income you will earn from your tenants. In an ideal scenario, your rental income should cover the costs of your mortgage and the property’s maintenance expenses.
If your rental property sustains a positive rental yield, you can use your increasing cash flow to add value to the property by renovating it. Or you can purchase another property, or use other methods to diversify your portfolio.
Growth of property value
Owning and maintaining a rental property will enable you to benefit from growth in the value of said property. This growth is driven primarily by external variables, including national economic factors, neighborhood development and demand, and population growth.
Significant increases in property value are never guaranteed. But you can boost your chances of benefiting from potential value growth by researching past pricing data and anticipated development trends for the locations of the properties you are considering before you purchase them.
Tax benefits
There are many different tax concessions you can take advantage of when maintaining and managing rental properties. On a mortgaged property, you may be able to claim annual loan interest and origination fees as tax-deductible expenses.
You could also potentially deduct the following costs from your taxes:
- Property depreciation
- Management and legal fees
- Repair and maintenance work
- Travel expenses pertaining to the maintenance of your rental property
The cons
Potentially unreliable tenants
Long-term tenants who pay their rent on time every month are the ideal tenants to have in your investment property. Unfortunately, not all tenants will take their obligations seriously, and some may consistently pay rent late or not at all.
This can mean facing periods of lost rental income while you navigate the process of eviction. There is however insurance that protects you against this, although it’s then an additional cost consideration that you need to weigh up.
Some tenants may also cause damage to your property that you’ll need to repair. This can take time and you may need to leave the property empty for the duration. Not only does this cost you money, you’ll lose income too.
Asset concentration
Purchasing any rental property constitutes a concentration of assets for most investors. This is a non-diversified and non-liquid asset that is exposed to risk from considerable declines in local tenant demand and neighborhood property values.
Management requirements
Rental investment properties require you to play an active role in maintaining them, selecting reliable tenants, overseeing repairs, and conducting inspections. If you are not interested in performing this active management, it’s possible to hire an external management agency to perform them on your behalf. They will however charge for this, so you need to consider the costs versus value they add.
Managing your rental property also involves the cost of upkeep. If you invest in an older property, you may face more maintenance and repair costs, while building new dwellings on a piece of land can bring excessive costs and financial challenges of its own.
Research the best option for your goals. Ensure that the rent you charge will adequately cover the repair and maintenance costs you expect to face once you’ve invested in the property.
Rental options for landlords
As well as the traditional landlord-tenant rental agreement, there are a number of other methods by which you can rent out an investment property over specified periods of time. They include:
- Seasonal rentals. If you rent out a property seasonally, you as a landlord may use it for 14 days a year or 10% of the number of days that you rent to tenants at a fair market price. In this agreement, you will still be able to deduct your expenses while enjoying your investment property for a short period each year.
- 1031 exchanges. In this form of rental agreement, you can sell a rental investment property and invest in another one that is similar to your original property. All without paying any additional capital gains taxes.
- Renting of extra space. You could choose to rent out a room or subdivided area of your own home, including a basement, garage, or accessory dwelling unit on the same lot. This allows you to write off a percentage of your mortgage interest and other maintenance expenses against that income. It’s important to be aware of your local zoning laws and other regulations pertaining to this form of sub-letting before signing any contracts with potential tenants.
Simplify the process with Podium
If you’re ready to invest in rental property but need a helping hand, Podium is the answer. Podium’s range of top-tier home services and tools enable property investors to become top rated service providers in their area, while offering superior customer and tenant experiences and getting paid as fast as possible.
This messaging platform is designed to meet the needs of business owners and landlords alike. It enables them to reach customers and tenants wherever they are, collect payments, communicate with third parties, attract new tenants, and gain reviews, all from a single inbox.
The platform’s tools include a unified inbox, web chat feature, payment systems, reviews, feedback, campaigns and more. All of which are designed to streamline a wide range of processes and make it easier than ever to earn money. These tools even assist you to manage your reputation and your property advertisements online, collect payments using secure payment links, and manage your entire investment portfolio through your mobile device.
Profiting from your investments has never been simpler.
The takeaway
If you are new to the world of rental property investment or you’re still unsure about whether or not to take the plunge, your best course of action is to arm yourself with as much information as possible.
Once you’ve done your homework and made a decision, you can start building up your property portfolio. Tools like Podium will make the process of managing and maintaining your investment even simpler, while allowing you to get paid on time, every time in the process.
