The In’s and Out’s of Rental Properties
March 14, 2017
Have you ever wondered if a rental property is beneficial for you? And what are the risks that come with it? For some people rental properties are a foreign language but here today I am going to translate that foreign language into one we all understand.
Many of us have started out in a rental property as our first big move out of the parents house to out on our own but being a rentee and being a renter are two completely different ball games. Being a rentee you don’t really know what goes on in the background all you know is your rent is due on a mutually decided day. and your property remains in working order.
So here today I am going to talk about that back end off it not being the rentee but the renter… is it worth it? Do the benefits out way the risks? and what going into maintaining a rental property.
The advantages to owning a rental property are definitely fewer than you’d think but the few that are positive are very powerful. If everything lines up you can make a lot of extra income from a rental property.
The few advantages would include:
INCOME FROM RENTERS
The biggest benefit of owning a rental property is that the renters will provide you a predicted monthly income flow. Those monthly payments go straight into an account of your choosing ideally offsetting any expenses from the property for the month.
INCOME FROM PROPERTY VALUE GROWTH
Since you own the property you gain from an increase in the property value over time due to changing demands in the area thing to the home will allow you to charge more for rent and it will increase the property value as well should you decide to sell it in the future.
The disadvantages to owning a rental property is definitely a longer list and talks more about the costs of actually owning a second property but don’t let this discourage you because the advantages completely out weigh the disadvantages in the long run.
The disadvantages would include:
CONCENTRATION OF ASSETS
One disadvantage of owning a rental property is that for most people these types of properties are serious concentrations of their assets. It takes a large portion of the average persons net income to fully own a rental property. The problem with that concentration is that it’s not diversified at all. The investment is in a specific location. If that neighborhood goes down in market value, you could end up losing a lot of money. If something unfortunate happens to that house that insurance can’t handle, you could potentially lose money as well. Like it or not, by owning a rental property, you’re tying yourself to the local real estate market. Concentration of assets is generally not considered a wise investment strategy. However, the more net income you have, the less this becomes a factor and the more that property ownership becomes a tool for diversification rather than something you’re concentrated in.
I’m sure we all know what this disadvantage point mean with out me even having to explain but I am going to anyway. Plain and simple, tenants are never guaranteed to pay their rent to you on time or if at all, even the seemingly best tenants could potentially leave you in a jam by not paying you what they owe for the month and also the time spent dealing with their non-payment and eviction. Sure, sometimes you’ll get a great tenant that pays their rent on time for years and years and years, but that’s never a guarantee.
TAXES FEES INSURANCE
Whether or not you have people in the house or not, you are still paying property tax and insurance on the house also any home owners association fees that come with the property. Those bills come, whether you have tenants in the home or not. The advantage is that is is a pretty stable cost and you will know about it in advance but no matter what its a cost that cuts into your profits. It being extremely painful if you don’t have a tenants as that means the costs are coming directly out of your pocket.
Even in the “hands off” situations with having tenants you are still going to be devoting some time to this rental investment. Eventually it will need repairs, you have to check on it, interact with your renters, and all the paper work that comes along with owning a rental property that is required. You could get rid of this hassle by hiring a management company but doing that will eat away at the profits you are making from renting out your property.
So will all that being said even though there are some risks associated with having a rental property there are also high advantages. Make sure you go into the process knowing as much information as you can so it can go smoothly for the renters but most importantly you. Do it right so that you can make the profit you planned on when you invested in your rental property.
Thanks for reading as always!
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