Currently, my husband and I are undergoing a period of transition that has involved moving and returning to school. As is the case with most transitory periods, we are viewing all the upheaval as an opportunity to reevaluate where we’re at financially and what kind of decisions we can make to set ourselves up for success going forward. One of the opportunities we’re discussing is whether or not to purchase a rental property. Considering the fact that my husband will likely spend the next 4+ years working on a college campus where there is a continual student need for housing, this opportunity is rather intriguing, which has caused us to take some time to research the benefits and drawbacks of owning a rental property and because we get questions about rental properties from clients on a regular basis, it made sense to share those results in an article.
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 it), 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.
Before you get too excited and run out to buy a rental property, take heed of some of the drawbacks of 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 take into account when considering purchasing a rental property, the aforementioned pros and cons should hopefully give you an idea of some of the things to consider when making this kind of decision. 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?” One of the most beneficial steps we took when considering this decision was talking to a relative who owns several properties about his experience. By speaking to real estate professionals and others who have undergone buying and renting out a rental property, you’ll have a better understanding of what to expect should you go through with the deal.
Beattie, Andrew. “Tips For The Prospective Landlord.” Investopedia. 2015. http://www.investopedia.com/articles/06/rentalrealestate.asp.