Several years ago, I was a licensed real estate agent but after investing and selling multiple real estate properties, I lost my passion for the business due to the stress of being a landlord. So I placed my state license inactive and haven’t returned to the field.
However, I do know what people are thinking when it comes to purchasing real estate. I know you’re surfing the internet wondering if you should buy a particular rental property that was recommended by a real estate agent or a close friend. Or maybe you just think its time for you to get into the game and make an easy profit.
But that’s way further from the truth. There is nothing easy about investing your hard earn money in anything.
You see during my years, I purchased a couple of rental properties. And honestly, after each closing, I felt good about adding another property to my portfolio. I even felt like I was on the right track to financial independence like most Guru’s falsely stated on their internet videos and television infomercials.
But it can be done successfully, as long as you are aware and be prepared for future pitfalls and unseen expenses that come with managing rental properties. Yeah, I know you’re saying, “I will just get a management company to handle the day to day business.” Absolutely, you can do that for an apartment building where there are multiples tenants, but doing it for a single-family dwelling will drain your profits very quickly.
I will also tell you that owning a rental property can be very profitable if the monthly rent is more than the monthly expenses. That’s why I’m going to discuss the pros and cons of owning rental properties because I want you to be informed and to make correct decisions based on facts and not solely on financial gain.
The Pros of Owning Real Estate
Let’s assume that you have already purchased your rental house and it’s in fair condition and in a good location. Because in real estate it’s all about location, location, and location.
Also, let’s assume that you’re happy about the low-interest rate and payment on a (30) year loan. However, you must be prepared for a possible repeat of market crashes or diminishing values of the housing market and neighborhoods.
So let’s talk about several pros of owning rental property. Monthly income from tenants is the most significant benefit because it gives you a direct monthly stream of income. Plus, you build equity in the property that will be useful in increasing your financial assets. Then come the property tax benefit that allows you to deduct mortgage interest, operating expenses, repairs, property tax and depreciation of the property.
This can be a very good tax write off and it can offset the taxes on your personal income.
But one very important aspect to keep in mind, you must keep very good records on your tenants, monthly expenses, repairs and bank accounts. Your business bank account must be separate from your personal bank account. There should be no commingling of funds between these two accounts. It will save you a lot of headaches and issues with filing your income tax. Plus if you get audited in the future the records will be up to date and organized.
So now that we have discussed the pros of owning rental property let’s move on to some cons and there are many. But I won’t bore you with all of them, just a few that will cause much stress in your daily life as being a landlord.
Cons Of Owning Rental Property
The first con we are going to talk about and the most important is when a tenant does not pay the rent on time or refuses to pay the rent at all. This can be really frustrating to an owner because the mortgage payment to the bank still has to be paid unless you paid cash for the property. Then kudos to you. But most people don’t have those types of funds.
So let’s say the tenant’s rent is $1400 dollars and the mortgage payment is $1100 dollars which includes the taxes and insurance. Oh did I forget to mention that you have to get insurance on the rental property? Well, you do and in some cases, it’s not cheap. But keeping with the figures above you would have a $300 dollar positive cash flow each month. Sounds good don’t it, sure it does if everything goes as plan.
However, suddenly your tenant stops paying the rent. But you still have to pay that $1100 dollar monthly mortgage note to the bank. It’s not the bank’s fault that your tenant ran into financial problems. So here’s the stressful part because if the tenant doesn’t pay the rent within (2) months they should be evicted from the home. But get this, they get to stay in the rental property while the eviction procedure is taking place in the courts and you still have to pay at least (3) months of mortgage payments with your own money.
This alone can place a landlord in the red for a very long time. And now the property is empty and repairs have to be completed for future tenants. In addition to this, you’re already $3300 dollars in the hole and you haven’t even added in the repair bills. That includes cleaning or buying new carpet, interior painting, lawn care, possibly appliance replacement and plumbing repairs, just to name a few.
So Do You Still Want Rental Properties?
Well, the answer to that question could still be yes or a definite no.
Maybe you feel the pros and cons of owning rental property outweigh the risk. On the other hand, the choice is yours and I’m only here to assist you in making the right choices, base on facts and good information.
After all, I didn’t even mention the emergency repair calls during the nighttime hours. But with all that said, the real estate business can be profitable if done correctly by screening and checking the credit of your future tenants and inspecting your property at least once a month.
My Advice To Rental Property Owners
Upon purchasing rental properties have a plan of how long you intend to keep the property. Purchase a property that is in fair to good condition and the appraisal value is much more than the purchase price. That way, as soon as you complete the repairs, the appraised value will immediately increase on the property.
In the best-case scenario, I would advise you to sell the property after a year and take the profits. Then you can evaluate the stressfulness of being a landlord and owning rental properties. Although, if you enjoyed it, then repeat the process of buying and selling the property between one or two years. Just remember that by keeping the property longer it may increase the chance of the neighborhood declining or a property similar to yours selling at a lower price.
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