Important Pros and Cons to Consider Before Buying a Rental Property
Thinking of buying a rental property? You’re not alone! The idea of owning a rental property (and treating it like a business, including filing paperwork and research Arizona LLC regulations) is exciting and enticing to many people. However, being a landlord isn’t the comfortable, passive job that it appears to be. It can take a lot of time and money to comply with health, safety, and maintenance standards, and ensure your investment is protected from problem tenants. Before you invest in a rental property, consider the following pros and cons.
A Rental Property Generates Income
Owning a rental property can be a great way to supplement your income. You can use this money to pay off the mortgage on your new house and even bring in some extra cash for yourself. A great rental property investment will generate a profit after paying for all your expenses, including your mortgage, taxes, and insurance—this is referred to as a positive cash flow. According to Mashvisor, your cash flow depends on your property type and location. As you look at properties for your next investment, remember that many of the expenses that come with a rental property are determined by location.
Maintenance Costs Can Add Up
On top of regular recurring expenses like insurance and property taxes, you’ll also have to cover maintenance costs and major unplanned expenses. For example, landlords are often responsible for caretaking the property grounds, repairing and replacing broken appliances, and regularly inspecting various home features like the roof or HVAC system. These costs can quickly add up and cause a significant amount of stress in your life. Fortunately, hiring a property manager will reduce the stress that comes with investing in rental properties. Property managers can handle everything from regular home maintenance to screening tenants, and the best property management agencies provide 24/7 assistance so you can rest easy.
You Get Generous Tax Deductions
While landlords are faced with all kinds of expenses, they’re also eligible for some fantastic tax deductions. According to SmartAsset, some of the rental property expenses you can deduct include your mortgage loan interest, property taxes, insurance premiums, regular maintenance, emergency repairs, utilities, legal fees, professional fees, and depreciation. With all of these deductions, you can significantly reduce the taxes you’ll owe on your rental property income.
Real Estate is a Long-Term Investment
Investing in rental real estate is a long-term game. You have to be ready to lock your money away for years—a move which can be concerning for many people. Buying a rental property requires a significant amount of capital, and you should be able to pay cash for the down payment on your home. If this is not realistic, make sure you can at least afford the mortgage payments without your rental income. It’s also important to avoid putting all of your eggs in one basket by investing all of your money in a rental property. Instead, buying a rental should be used to diversify your investments.
Recovering from Bad Tenants is Difficult
The risk of problem tenants is one of the biggest disadvantages to owning a rental property. Ideally, you can find tenants who take good care of your home and always pay rent on time, but this isn’t always the case. Evicting tenants who do not pay rent can be time-consuming and costly. The same goes for cleaning up and repairing your home after tenants who have caused wear and tear to your property. On the other hand, you always face the risk of being unable to find tenants—during this period, your empty property would not be pulling in any income.
Before you buy a rental property, make sure you’re ready to handle the time commitment and expenses that come with the job. Remember, you can always hire the help of a property manager! Just be sure to account for this additional expense and ensure you can still enjoy positive cash flow from your rental.