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  • Writer's pictureSteve Coker, CFP

The Pros and Cons of Owning a Rental Property




We are frequently asked whether it is a good idea to invest in real estate. The answer of course is “it depends”.  As the saying goes, real estate is local. Unlike a diversified portfolio of stocks and bonds, the return on a rental property can be highly dependent upon the specifics of the property: location, purchase price, rental income, tenant experience, and more.  I encourage my clients to approach buying a rental property as they would approach starting a small business. A wise investor will create a business plan, which considers income and expenses. What will be the rental income? What are the expenses? What are the risks? Do I have sufficient assets to survive a downturn? Do I have the time to manage the property? All are important questions to consider before buying. 

 

Of course, there are some general statements that we can make regarding real estate investing.  Here are a few pros and cons as you consider whether a rental property is right for you.

 

The Pros

Unlike financial assets (stocks, bonds, mutual funds, etc.), a rental property is a tangible asset – meaning you can touch it.  As a tangible asset, you can also improve a rental property, thereby adding value through sweat equity, something you can’t do to your holding of Apple stock.  Additionally, a good rental property should produce income – excess cash to you that was produced by the property in addition to the mortgage being paid down.  Like your primary residence (if you own), a rental property also has the potential to appreciate resulting, hopefully, in a greater sale price than you initially paid.  Finally, there can be significant tax advantages to owning a rental property depending on the income it produces, expenses, and depreciation.

 

The Cons

Before you get too excited and run out to buy a rental property, take heed of some of the drawbacks to owning a rental property.  As the owner of a rental property, you become a landlord, which means that you’re responsible when things break.  Having to fix things at your rental property can be very costly, particularly if you haven’t set aside money for repairs beforehand.  In addition to the inevitable clogged toilet, you also run the risk of having bad tenants and as anyone who has played landlord to a bad tenant will tell you, dealing with and cleaning up after an irresponsible tenant can quickly turn into a giant nightmare.  Lastly, you also run the risk of vacancy.  A rental property is only able to generate profit if someone is renting it.  If the area goes through a dry spell and no one wants to pay to live in your property, you’re still on the hook for paying the mortgage.

 

While there are certainly other factors to consider, this list should give you a good starting point.  Like any financial decision, choosing to purchase a rental property should be done in the context of the rest of your financial situation.  It should involve asking yourself questions like “Do I have enough extra cash to continue paying the mortgage if I can’t find a renter?” and “Have I set aside money for repairs?”  We encourage you to do your homework and talk with real estate professionals and others before investing.  You will have a better understanding of what to expect should you go through with the deal.

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